Some of the Factors (With Selected Explanations) Used in Calculating

question 15

Multiple Choice

Some of the factors (with selected explanations) used in calculating the basic "net present value" and the "incremental" cash flows of a capital project are:
(i) - expected after-tax terminal value, including recapture of working capital.
(ii) - net income, which belongs to the equity holders of the firm.
(iii) - initial investment at inception.
(iv) - depreciation, and the fact that depreciation is a noncash expense. (i.e. it is removed from the calculation of net income, for tax purposes, but added back because it did not actually flow out of the firm)
(v) - weighted-average cost of capital.
(vi) - the firm's after-tax payment of interest to debt holders.
(vii) - economic life of the capital project in years.
-The "incremental" cash flows of a capital project are calculated by using:

• A) (i), (ii), and (iii).
• B) (ii), (iv), and (vi).
• C) (i), (iii), (v), and (vii).
• D) (iv), (v), (vi), and (vii).

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