Question 7: Answer both questions (10 points)

A) The likely effect of discounting nominal cash flows with real interest rates will be to make an investment's NPV appear more attractive. Do you agree? Explain.

B) Calculate the present value of the depreciation tax shield for an asset with a three-year estimated life costing $100,000. The firm has a 35 percent tax rate and a 10 percent cost of capital. Its CCA is 30 percent declining balance with a half-year rule. Compare this present value to that calculated for straight-line depreciation with no salvage value in both cases.

In answering these questions, you must explain to me briefly how you come to your results/conclusions. When you are using the financial calculator, make sure you list the keys you have used in proper sequence.