boken kap 7 del 2

Question 1

Q: What are the four steps in capital budgeting analysis?

Answer 1

1. Calculate depreciation for each year.
2. Generate a profit and loss statement to identify tax payments.
3. Construct a cash flow forecast.
4. Perform investment appraisal analysis.

Question 2

Q: When does an investment in net working capital arise?

Answer 2

A:
1. When inventory is purchased.
2. When cash is kept in the project as a buffer.
3. When credit sales are made.

Question 3

Q: How does an investment in net working capital affect cash flow?

Answer 3

A: It represents a cash outflow, and changes in working capital represent cash flows

Question 4

Q: What is the real interest rate?

Answer 4

A: The interest rate adjusted for inflation.

Question 5

Q: How should cash flows and discount rates be matched in terms of inflation?

Answer 5

A: Nominal cash flows must be discounted by the nominal rate, and real cash flows must be discounted by the real rate.

Question 6

Q: What are the three approaches to calculating operating cash flows?

Answer 6

1. Bottom-up approach: Net income + depreciation.
2. Top-down approach: Sales - costs - taxes.
3. Tax-shield approach: OCF = (sales - costs) × (1 - tax rate) + (depreciation × tax rate).

Question 7

Q: What are the two components of the tax-shield approach?

Answer 7

1. Project’s cash flow without depreciation.
2. Depreciation tax-shield (depreciation × tax rate).

Question 8

Q: What method is used to compare investments with different lifespans?

Answer 8

A: The equivalent annual cost (EAC) method.

Question 9

Q: When should a firm replace a machine?

Answer 9

A: If the annual cost of the new machine is less than the annual cost of the old machine.