FIN 534 Week 6 Homework Assignment Chapter 11
1. Which of the following statements is CORRECT?
a. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the banks other offices to decline.
b. The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
c. Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.
d. Identifying an externality can never lead to an increase in the calculated NPV.
e. An externality is a situation where a project would have an adverse effect on some other part of the firms overall operations. If the project would have a favorable effect on other operations, then this is not an externality.
2. Which of the following statements is CORRECT?
a. If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its customers. Thus, cannibalization is dealt with by society through the antitrust laws.
b. If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward.
c. If cannibalization is determined to exist, then this means that the calculated NPV if cannibalization is considered will be higher than the NPV if this effect is not recognized.
d. Cannibalization, as described in the text, is a type of externality that is not against the law, and any harm it causes is done to the firm itself.
e. If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its competitors. Thus, cannibalization is dealt with by society through the antitrust laws.
3. Which of the following statements is CORRECT?
a. Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
b. Corporations must use the same depreciation method (e.g., straight line or accelerated) for stockholder reporting and tax purposes.
c. Since depreciation is not a cash expense, it has no effect on cash flows and thus no effect on capital budgeting decisions.
d. Under accelerated depreciation, higher depreciation charges occur in the early years, and this reduces the early cash flows and thus lowers a projects projected NPV.
e. Using accelerated depreciation rather than straight line would normally have no effect on a projects total projected cash flows but it would affect the timing of the cash flows and thus the NPV.
4. Which of the following statements is CORRECT?
a. Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
b. Corporations must use the same depreciation method for both stockholder reporting and tax purposes.
c. Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a projects forecasted NPV.
d. Using accelerated depreciation rather than straight line normally has no effect on a projects total projected cash flows nor would it affect the timing of those cash flows or the resulting NPV of the project.
e. Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset.
5. Which of the following statements is CORRECT?
a. Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 3 years or longer.
b. If firms use accelerated depreciation, they will write off assets slower than they would under straight-line depreciation, and as a result projects forecasted NPVs are normally lower than they would be if straight-line depreciation were required for tax purposes.
c. If they use accelerated depreciation, firms can write off assets faster than they could under straight-line depreciation, and as a result projects forecasted NPVs are normally lower than they would be if straight-line depreciation were required for tax purposes.
d. If they use accelerated depreciation, firms can write off assets faster than they could under straight-line depreciation, and as a result projects forecasted NPVs are normally higher than they would be if straight-line depreciation were required for tax purposes.
e. Since depreciation is not a cash expense, and since cash flows and not accounting income are the relevant input, depreciation plays no role in capital budgeting.