normal cash flows

Management Body of Knowledge Guide
November 7, 2019
to communicate at the college level
November 7, 2019

normal cash flows

rojects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L’s IRR is 12%. The two projects have the same NPV when the WACC is 7%. Which of the following statements is CORRECT (Hint: Draw NPV profiles of Projects S and L on the same graph)?

A. If the WACC is 10%, both projects will have a negative NPV.
B. If the WACC is 6%, Project S will have the higher NPV.
C. If the WACC is 13%, Project S will have the lower NPV.
D. Project S’s NPV is more sensitive to change in WACC than Project L’s.
E. If the WACC is 10%, both projects will have positive NPVs.

You are evaluating the acquisition of a new ski machine. Its price is $200,000, and it costs $40,000 to install. It falls into the MACRS 3-year class. The machine will save the firm’s operating costs by $125,000 per year and require a $10,000 increase in inventory when it is installed. It will be used for 4 years and then sold for $25,000. Your firm’s tax rate is 40%, and the project’s cost of capital is 10% (MACRS depreciation schedule for a 3-year class asset is: 33%, 45%, 15%, and 7%).

What is the initial net investment outlay in Year 0?
A. $230,000
B. $200,000
C. $240,000
D. $250,000
E. $210,000

What is the after-tax cash flow (both operating and non-operating) in Year 4? use same information that was given for the previous question about the new ski machine
A. $106,720
B. $91,720
C. $141,720
D. $81,720
E. $116,720

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