a) There are four rules regarding how net present value should be applied in practice. They...

 

Transcribed Image Text:

a) There are four rules regarding how net present value should be applied in practice. They relate to the identification of relevant cash flows, which elements to include, the treatment of inflation, and to how the impact of debt finance is treated. Expand on each of these rules, and discuss how they should be applied in practice. [10 marks] b) A project requires an initial investment of €200,000 and expects to produce a cash flow before taxes of €120,000 per year for two years (cash flows will occur at t = 1 and t = 2). The company tax rate is 21 percent. The assets will depreciate using the following schedule: (Year 1, 33%); (Year 2, 45%); (Year 3, 15%); ( Year 4, 7%). The company's tax situation is such that it can use all applicable tax shields. The opportunity cost of capital is twelve percent. Assume that the asset can sell for book value at the end of the project. Calculate the net present value of the project. [10 marks] c) Common practical problems associated with investment appraisal include the timing problem and the choice between short- and long-run investment proposals. Describe each of these problems, and also outline any possible solutions. [10 marks] a) There are four rules regarding how net present value should be applied in practice. They relate to the identification of relevant cash flows, which elements to include, the treatment of inflation, and to how the impact of debt finance is treated. Expand on each of these rules, and discuss how they should be applied in practice. [10 marks] b) A project requires an initial investment of €200,000 and expects to produce a cash flow before taxes of €120,000 per year for two years (cash flows will occur at t = 1 and t = 2). The company tax rate is 21 percent. The assets will depreciate using the following schedule: (Year 1, 33%); (Year 2, 45%); (Year 3, 15%); ( Year 4, 7%). The company's tax situation is such that it can use all applicable tax shields. The opportunity cost of capital is twelve percent. Assume that the asset can sell for book value at the end of the project. Calculate the net present value of the project. [10 marks] c) Common practical problems associated with investment appraisal include the timing problem and the choice between short- and long-run investment proposals. Describe each of these problems, and also outline any possible solutions. [10 marks]

Answer rating: 100% (QA)

a b How the Ne... View the full answer