Deck 10: Project Cash Flows and Risk Appendix

Question 1

The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, for the duration of a project's life, other things held constant.

Answer 1

False

Question 2

A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses MACRS accelerated depreciation than if it uses the optional straight-line alternative, other things being equal.

Answer 2

True

Question 3

Other things held constant, which of the following would increase the NPV of a project being considered?

A)A shift from MACRS to straight-line depreciation.
B)Making the initial investment in the first year rather than spreading it over the first 3 years.
C)A decrease in the discount rate associated with the project.
D)The sale of the old machine, in a replacement decision, at a capital loss rather than at book value.
E)An increase in required working capital.

Answer 3

C

Question 4

Which of the following statement completions is incorrect? For a profitable firm, when MACRS accelerated depreciation is compared to straight-line depreciation, MACRS accelerated allowances produce

A)Higher depreciation charges in the early years of an asset's life.
B)Larger cash flows in the earlier years of an asset's life.
C)Larger total undiscounted profits from the project over the project's life.
D)Smaller accounting profits in the early years, assuming the company uses the same depreciation method for tax and book purposes.
E)None of the above (All of the above are correct.)

Question 5

The primary advantage of accelerated depreciation over straight line depreciation is that the total, undiscounted, depreciation tax savings over the life of the project are greater when an accelerated depreciation method is used.