Financial management 2 test 2

tax shield is equal to the reduction in a firm’s

total tax liability resulting from a tax deductible expense

bonus depreciation is often favored for the corporation’s set of tax books

it allows the depreciation tax savings to be realized earlier

the present value of the depreciation tax shield at any given discount rate is

higher with bonus depreciation than with straight line depreciation

the additional inventory that is often required for new projects is partially offset by

increasing accounts payable

bonus depreciation allows an increase in

depreciation in the first year only

the rationale for not including sunk costs in capital budgeting decisions is that they

have no incremental effect on project cash flows

you are considering the introduction of a new product that will require an investment in new machinery. What will lower the net present value of that project

a loss of sales of existing products due to the introduction of the new product

a firm invests in a 7 year project that requires the purchase of a 135,000 machine tool. this will be depreciated using 100% bonus depreciation in the first year and will have no salvage value. when will this equipment affect the project’s tax payments

at the time of purchase only

under bonus depreciation

assets are fully expensed when purchased

given a positive discount rate this would increase the NPV of a project

reducing the amount of net working capital that is needed

the present value of the depreciation tax shield at any given discount rate is

higher with bonus depreciation that with straight line depreciation

when a depreciable asset is ultimately sold, the sale price is

taxable to the extent that the sales price exceeds book value

the statement “We’ve got too much invested in that project to pull out now” possibly illustrates the desire to

recognize sunk cost

a new project requires an increase in both current assets and current liabilities of 125,000 each. what is the overall impact on the net working capital investment

an increase of zero