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An asset depreciated in the 5-year MACRS class is fully depreciated at the end of 5 years.

- Suppose the NPV of a project?s inflows is positive at a discount rate of 10%. From this we know that the IRR of this project is greater than 10%. (Assume that project has an immediate cash outflow and all future cash flows are positive).

If we sell an asset for $10,000 and our tax rate is 30%, the resulting after-tax cash flow is $7,000.

- If project A has a higher IRR than project B, then project A has to have a higher NPV than project B.
- If we sell an asset, the after-tax cash flow cannot be larger than the pre-tax cash flow.

- Bond prices move primarily because of changes in default risk.

- In the WACC, we use the book value of debt and equity to determine the appropriate weights on the sources of capital.
- The Altman Z-score is commonly used to estimate a firm?s stock price.

- Most US corporate bonds are investment grade.

Shareholders will react negatively to the announcement of a non-convertible preferred stock issue because this issue will dilute their equity position.

- Suppose that the end of our road building project our earthmover has no market value. It would thus have no impact on the project?s incremental cash flows. Assume that a firm has a WACC of 15%. It is considering a project of typical risk that requires an investment of? $1 million today and generates annual profits of $250,000 for five years; the first flow beginning in exactly one year. (There are no other relevant cash flows.) Since this is a profitable project, it will increase the value of the firm.

Consider the following mutually exclusive projects. Each cash flow occurs at the end of each year. The discount rate is .05.

Year | A | B | C | D |

0 | -1000 | -1000 | -1000 | -1000 |

1 | 500 | 365 | 470 | |

2 | 500 | 365 | 470 | |

3 | 365 | 470 | ||

4 | 1550 | 365 |

- Which project has the best payback period?
- Which project has the best discounted payback period?
- Which project has the best accounting rate of return?
- Which project has the best NPV?
- Which project has the best IRR?

The following 4 questions refer to the following project (all cash flows occur at the end of the period). The WACC = .1.

Year | Cash flow after taxes |

0 | -100 |

1 | 41 |

2 | 41 |

??????3 | ??????????????41 |

Is this an acceptable project using the NPV rule?

Is this an acceptable project using the IRR rule?

What annual future cash flow would make the NPV exactly zero (assume as before that the future cash flows are an annuity)?

If the project?s positive cash flows were all delayed by one year, by how much would the NPV decrease?

Alvarez Inc. is considering investing $1,000,000 in a new tequila distilling machine. It is depreciated in the 3-year ACRS class. It will increase the firm?s incremental profit by $400,000 per year before taxes and depreciation. It will require the commitment of $100,000 in net working capital (consider this to be an opportunity cost) for the life of the project. The machine?s estimated terminal value is $200,000 at the end of its four-year economic life. The firm?s tax rate is 30%..

Assume we are evaluating 2 Canadian firms of comparable size in the igloo building industry. Both have a 30% tax rate. Firm A has zero debt, a beta of 1.2 and Firm B has a beta of 1.5. Estimate Firm B?s debt-to-equity ratio.

On the diagram above, which of the securities A or B is superior using Sharpe?s ratio as the measure of performance?

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