You Plan to Analyze the Value of a Potential Investment

question 13

Multiple Choice

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

• A) The cash flows are in the form of a deferred annuity,and they total to $100,000.You learn that the annuity lasts for only 5 rather than 10 years,hence that each payment is for $20,000 rather than for $10,000.
• B) The discount rate increases.
• C) The riskiness of the investment's cash flows decreases.
• D) The total amount of cash flows remains the same,but more of the cash flows are received in the earlier years and less are received in the later years.
• E) The discount rate decreases.

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Definitions:

Depreciation Tax Shield

A reduction in taxable income resulting from the ability to deduct depreciation expenses, thereby lowering the tax liability for a business.

CCA Deduction

Stands for Capital Cost Allowance deduction, a tax deduction in certain jurisdictions that allows businesses to deduct the depreciated value of capital assets.

Corporate Tax Rate

The tax rate imposed on the net income of a corporation by the government.

Tax Shield

The reduction in income taxes that results from taking an allowable deduction from taxable income, such as the interest on debt.