The Calculation of the Net Present Value of an Investment

question 31

Multiple Choice

The calculation of the net present value of an investment project requires that the depreciation tax shield be included at:

• A) the amount of the depreciation with no adjustment for taxes.
• B) the amount of the depreciation times one minus the tax rate.
• C) the amount of the depreciation times the tax rate.
• D) zero, since depreciation is not relevant to the calculation of net present value.

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Definitions:

Fixed Expenses

Costs that remain constant regardless of the level of production or business activity.

Sales

The total revenue generated from goods or services sold by a company during a specific period.

Residual Income

A measure of the excess profit that exceeds the required rate of return on investment.

Required Rate Of Return

The minimum return an investor expects to achieve by investing in a particular asset, reflecting the risk level of the investment.