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Exam 6: Making Investment Decisions With the Net Present Value Rule

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Question 21

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When evaluating projects with positive NPV but different life spans,the proper technique to employ is the equivalent annual cash-flow approach.

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Question 22

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The real interest rate is 3.0% and the inflation rate is 5.0%.What is the nominal interest rate?

A) 3.00%
B) 5.00%
C) 8.15%
D) 2.00%

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Question 23

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Briefly discuss how tax reporting to governments vs.shareholders is treated in countries like Japan.

Germany allows firms to choose the following depreciation methods: i.straight-line method; II) declining-balance method

The equivalent annual cash-flow technique is primarily used whenever the lives of two different projects are the same.

Proper treatment of inflation in NPV calculations involves: I.discounting nominal cash flows by the nominal discount rate; II.discounting real cash flows by the real discount rate; III.discounting nominal cash flows by the real discount rate

By undertaking an analysis in real terms,the financial manager avoids having to forecast inflation.

A firm has a general-purpose machine,which has a book value of $300,000 and is worth $500,000 in the market.If the tax rate is 35%,what is the opportunity cost of using the machine in a project?

The current market value of a previously purchased machine proposed for use in a project is an example of a:

OM Construction Company must choose between two types of cranes.Crane A costs $600,000,will last for five years,and will require $60,000 in maintenance each year.Crane B costs $750,000,will last for seven years,and will require $30,000 in maintenance each year.Maintenance costs for cranes A and B occur at the end of each year.The appropriate discount rate is 12% per year.Which machine should OM Construction purchase?

Briefly explain how the decision to replace an existing machine is made?

A project requires an investment of $900 today.It can generate sales of $1,100 per year forever.Costs are $600 for the first year and will increase by 20% per year.(Assume all sales and costs occur at year-end,i.e.,costs are $600 @ t = 1.) Ignore taxes and calculate the NPV of the project at a 12% discount rate.

Define the term cash flow for a project.

One should consider net working capital (NWC) in project cash flows because:

When Honda develops a new engine the incidental effects might include the following: I.demand for replacement parts; II.profits from the sale of repair services; III.offer modified or improved versions of the new engine for other uses

The real rate of interest is 3% and inflation is 4%.What is the nominal rate of interest?

Investment in inventories includes investment in: i.raw material; II) work-in-progress; III) finished goods

A financial analyst should include interest and dividend payments when calculating a project's cash flows.

Working capital is one of the most common sources of mistakes in estimating project cash flows.

Given the following data for Project M: