Net present value is based on many estimates and forecasts. Assuming everything else is equal and that you’re risk adverse, which firm would you invest in and why? Firm B has fixed costs that account for 80 percent of total costs, and variable costs account for 20 percent of total costs.
They must be subtracted from cash inflows (measured by other cash flow). Changes in NWC indicate cash outflows (measured by change in NWC) must be subtracted from cash inflows (measured by operating cash flow). Changes in NWC have important tax implications (a tax shield), so they must be multiplied by 1 minus the tax rate to find total cash flow.
Why is it important to find changes of net working capital (NWC) in developing cash flows? Changes in NWC indicate capital expenditures (such as purchase of equipment).
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Questions 1 to 20: Select the best answer to each question.
If 1,000 units are sold (cash break even), the project has a negative NPV. If 1,000 units are sold (cash break even), the project has a positive NPV. You’re working on a bid to build two apartment buildings a year for the next three years.
- Chapter 10 focuses on the fundamentals of capital budgeting and why these decisions are the most important investment decisions made by the firm.
If a firm accepts Project A, it won’t be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery.
Depreciation is a way to allocate the cost of capital expenditures (equipment) over the useful life of the asset.
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