True or false?

1. Assuming positive inflation rates, Real values < Nominal values.
2. Investing decisions are based on both the investment opportunities and the options available for financing.
3. If a project has NPV=0, it means the project earns a return equal to zero. (Explain reasoning)
4. All else equal, accelerated depreciation (MACRS, double-declining, etc.) increases NPV compared to straight-line depreciation.

Multiple Choice:

5. Identify all of the below which should be treated as relevant cash flow when deciding to invest in a new manufacturing plant. Suppose the company already owns the site but the existing building would need to be demolished.

a. Lost earnings on other products due to executive time spent on the new facility.

b. The market value of the site and existing buildings.

c. The benefits from the tax shield from the future depreciation of the new plant.

d. The cost of a new access road put in last year.

e. A proportion of the cost of leasing the president's jet airplane.

f. Demolition costs and site clearance.

g. Future depreciation of the new plant.

h. The initial investment in inventories of raw materials.

i. Money already spent on engineering design of the new plant.

6. MZ travel Co. is analyzing a project that requires $264,000 of fixed assets. When the project ends, those assets are expected to have an after-tax salvage value of $72,000. How is the $72,000 salvage value handled when computing the NPV of the project?

a. Incorporated in the NPV calculation at time 0, as an cash outflow.

b. Included as a cash inflow in the final year of the project.

c. Excluded from the NPV calculation.

d. Included as cash inflow for the year following the final year of the project.

e. Incorporated as cash inflow prorated over the life of the project.