Suppose that an analyst makes a mistake and calculates the NPV of an investment project by discounting the projects contribution to net income each year rather than by discounting its relevant cash flows. Would you expect the NPV based on net in-come to be higher or lower than the NPV calculated using the relevant cash flows?
Answer to relevant QuestionsCalculate the present value of depreciation tax savings on a depreciable asset with a purchase price of $5 million and zero salvage value, assuming a 10 percent discount rate, a 34 percent tax rate, and the following type of ...For a firm considering expansion of its existing line of business, why is the WACC, rather than the cost of equity, the preferred discount rate if the firm has both debt and equity in its capital structure? Assuming that there are no corporate income taxes, how can the costs of preferred stock and debt be estimated without finding a preferred stock and a bond beta? What are American Depositary Receipts (ADRs), and how are these created? Why do you think ADRs have proven to be so popular with U. S. investors? What does the term under-pricing refer to? If the average IPO is underpriced by about 15 percent, how could an unsophisticated investor, who regularly invests in IPOs, earn an average return less than 15 percent?
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