FIN 300 Study Guide - Tax Shield, Cash Flow, Net Income

74 views18 pages

cerisewater-buffalo256

11 Jun 2011

School

Department

Course

Professor

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

Answers to concepts review and critical thinking questions. An opportunity cost is the most valuable alternative that is foregone if a particular project is undertaken. The relevant opportunity cost is what the asset or input is actually worth today, not, for example, what it cost to acquire. The cash portion of current assets will be retrieved. Some receivables won"t be collected, and some inventory will not be sold, of course. Counterbalancing these losses is the fact that inventory sold above cost (and not replaced at the end of the project"s life) acts to increase working capital. The eac approach is appropriate when comparing mutually exclusive projects with different lives that will be replaced when they wear out. This type of analysis is necessary so that the projects have a common life span over which they can be compared; in effect, each project is assumed to exist over an infinite horizon of n-year repeating projects.

Related Questions

1. Which of the following is not a complication for capitalbudgetingâ analysis?

A.Externalities B.Sunk costs C.Opportunity costs D.Indirectcosts E.Dual costs

2. Which of the following is not an approach for comparingprojects with unequalâ lives?

A.Standard Life B.Equivalent AnnualAnnuity C.Replacement Chain

3. When evaluating a newâ project, the firm should consider allof the following factors EXCEPT

A.previous expenditures associated with a market testing.

B.the current market value of any equipment to be replaced.

C.the resulting difference in depreciation expense if theproject involves replacement.

D.changes in working capital attributable to the project.

olivehippopotamus285

The following are the cash flows of two projects:

Year	Project A	Project B
0	â$220	â$220
1	100	120
2	100	120
3	100	120
4	100

a.	If the opportunity cost of capital is 10%, calculate NPV for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project	NPV
A	$
B

Which of these projects is worth pursuing if you have enough funds and they are not mutually exclusive?

	Project A
	Project B
	Both

yellowwoodchuck103

Which of the following five statements are correct?

The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is about 8.3%.

Fundamentally, interest rates are determined by the Federal Reserve (central bank).

The rate of growth of your purchasing power is determined by the nominal interest rate.

Real interest rates indicate the rate at which your money will grow if invested for a certain period.

The investor's opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted.

Which of the following five statements are correct?

When the risks of two projects are different, only the NPV rule will give a reliable answer.

When the risks of two projects are different, only the IRR rule will give a reliable answer.

The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital.

The profitability index can can be easily adapted for determining the correct investment decisions when multiple resource constraints exist.

You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is the profitability index.

FIN 300 Study Guide - Tax Shield, Cash Flow, Net Income

Document Summary

Get access

Related Documents

FIN 300 Lecture Notes - Lecture 9: Operating Cash Flow, Tax Shield, Cash Flow

FIN 300 Study Guide - Tax Shield, Cash Flow, Net Income

FIN 300 Chapter Notes - Chapter 10: Operating Cash Flow, Tax Shield, Cash Flow

Related Questions