Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 6, Problem 3PS
Cash flows True or false?
- a. A project’s
depreciation tax shields depend on the actual future rate of inflation. - b. Project cash flows should take account of interest paid on any borrowing undertaken to finance the project.
- c. In the U.S., income reported to the tax authorities must equal income reported to shareholders.
- d. Accelerated depreciation reduces near-term project cash flows and therefore reduces project
NPV .
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Students have asked these similar questions
The present value of the expected net cash inflows for a project will most likely exceed the present value of the expected net profit after tax for the same project because
Group of answer choices
Cash flow reflects any change in net working capital, but sales do not.
Income is reduced by dividends paid, but cash flow is not.
Income is reduced by depreciation charges, but cash flow is not.
Income is reduced by taxes paid, but cash flow is not.
There is a greater probability of realizing the projected cash flow than the forecasted income.
Question 1
Which one of the following statements is NOT correct?
Group of answer choices
If the initial cost of a project is increased, the net present value of that project will decrease.
The MIRR is specifically designed to address conventional cash flows.
If the internal rate of return equals the required return, the net present value will equal zero.
Net present value is equal to the investment’s cash inflows discounted to today's dollars minus the initial cost of the investment.
Net present value is negative when the required return exceeds the internal rate of return.
Which of the following statements is true about the internal rate of return?
a.
It is the interest rate that sets a project's net present value at zero.
b.
It is the minimal acceptable interest rate on an investment.
c.
It is the difference between the present value of the cash inflows and outflows associated with a project.
d.
It is the difference between the present value of a cash outflow and the depreciation associated with an asset.
Chapter 6 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 6 - Cash flows Which of the following should be...Ch. 6 - Real and nominal flows Mr. Art Deco will be paid...Ch. 6 - Cash flows True or false? a. A projects...Ch. 6 - Depreciation How does the PV of depreciation tax...Ch. 6 - Working capital The following table tracks the...Ch. 6 - Prob. 6PSCh. 6 - Prob. 7PSCh. 6 - Mutually exclusive investments and project lives...Ch. 6 - Replacement decisions Machine C was purchased five...Ch. 6 - Prob. 10PS
Ch. 6 - Prob. 12PSCh. 6 - Working capital Each of the following statements...Ch. 6 - Depreciation Ms. T. Potts, the treasurer of Ideal...Ch. 6 - Project NPV and IRR A project requires an initial...Ch. 6 - Project NPV A widget manufacturer currently...Ch. 6 - Project NPV Marsha Jones has bought a used...Ch. 6 - Project NPV United Pigpen is considering a...Ch. 6 - Project NPV Hindustan Motors has been producing...Ch. 6 - Equivalent annual cash flows As a result of...Ch. 6 - Prob. 25PSCh. 6 - Replacement decisions Hayden Inc. has a number of...Ch. 6 - Prob. 27PSCh. 6 - Prob. 28PSCh. 6 - Prob. 29PSCh. 6 - Prob. 30PSCh. 6 - The cost of excess capacity The presidents...Ch. 6 - Effective tax rates One measure of the effective...Ch. 6 - Equivalent annual costs We warned that equivalent...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Which one of the following statements is correct? If the initial cost of a project is increased, the net present value of that project will also increase. The net present value is positive when the required return exceeds the internal rate of return. If the internal rate of return equals the required return, the net present value will equal zero. Net present value is equal to an investment's cash inflows discounted to today's dollars.arrow_forwardTrue or False: If a project involves buying an asset, and if the company uses “accelerated depreciation” for tax purposes, after-tax cash flows for the project would be smaller in earlier years of the project than if the company used “straight line depreciation”, and therefore the project’s NPV would be smaller if it used accelerated depreciation, compared to the NPV if it used straight-line depreciation. Explain your answer.arrow_forwardAdjusted present value technique is a technique that A) adjusts conventional present value for nonconstant cash inflows B) suggests separating tax savings from interest in the cash flows within the valuation process C) is used to value a project for a multinational corporation D) simply adjusts the conventional present value for nominal interestarrow_forward
- What are the reinvestment rate assumptions for the NPV and the IRR? A.IRR: Risk Free Rate NPV: WACC B.IRR: The IRR itself NPV: WACC C.The cash flows generated by the project are not assumed to be reinvested. So they will not earn a rate of return. D.IRR: Risk free rate NPV: Risk free Rate E. IRR:WACC NPV: WACCarrow_forwardThe internal rate of return is the: discount rate that makes present value of cash inflows equal to present value of cash outflows. discount rate that causes a project's after-tax income to equal zero. discount rate that results in a zero net accounting return. rate of return required by the project's investors.arrow_forwardWhat is the 'golden rule' for finding the Internal Rate of Return (IRR) of an investment project cash flow? a)Vary the discount rate until the net present value of the cash flow equals zero. b)Vary the discount rate until the net present value of the cash flow is positive c)Vary the discount rate to the point of maximum increase in the net present value d)Vary the discount rate until the net present value of the cash is negativearrow_forward
- The payback period is a non - discounted cash flow technique that measures: a. The time required to recover the initial investment b. The profitability of the project c. The net present value of the project d. The internal rate of return of the projectarrow_forwardQUESTION #1: Which of the following is a disadvantage of using the IRR method of capital budgeting over other types: A- IRR does not consider the time and value of money. B- IRR assumes reinvestment of project cash flows at the same rate as the IRR C- IRR ignores the prudent simplicity of paybacks D- None of the above QUESTION #2: The net present value (NPV) of an investment is___________. A- The present value of all benefits (cash inflows) B- The present value of all costs (cash outflows) of the project C- The present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project D- The present value of all benefits (cash outflows) minus the present value of all costs (cash inflows) of the projectarrow_forwardIn the payback method, depreciation is added back to net operating income when computing the annual net cash flow. True or False The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash outflows with the present value of its cash inflows. True or False The internal rate of return method assumes that the cash flows generated by the project are immediately reinvested elsewhere at a rate of return that equals the company's cost of capital. True or False An increase in the expected salvage value at the end of a capital budgeting project will increase the internal rate of return for that project. True False The minimum required rate of return is the discount rate that makes the net present value of the project equal to zero. True False The production budget is typically prepared before the direct materials budget. True False The selling and administrative budget is typically prepared…arrow_forward
- Which of the following statements is most correct? If a project’s internal rate of return (IRR) exceeds the cost of capital, then the project’s net present value (NPV) must be positive. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital. Answers a and c are correct. None of the answers above are correct.arrow_forwardWhat name is given to the time value of money technique that discounts the after-tax cash flows for a project over its life to time period zero using the company’s minimum desired rate of return? a. net present value method b. capital rationing methodc. payback method d. average rate of return method e. accounting rate of return methodarrow_forwardWhy is the NPV of a relatively long-term project (one for which a high percentage of its cash flows occurs in the distant future) more sensitive to changes in the WACC than that of a short-term project?arrow_forward
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