Which of the following statements regarding capital investment analysis is FALSE?

If the after-tax cost of debt is 10%, what is the approximate pre-tax cost for a firm in the 40% tax bracket?

A depreciation tax [term1] is a tax reduction technique under which depreciation expense is subtracted from taxable income. This amount is calculated as the applicable tax rate, multiplied by the amount of depreciation (1 point).

A depreciation tax [term1] is a tax reduction technique under which depreciation expense is subtracted from taxable income. This amount is calculated as the applicable tax rate, multiplied by the amount of depreciation (1 point).

Repeated for your convenience: Marc Corporation wants to purchase a new machine for $400,000. Management predicts that the machine will produce cash sales of $275,000 each year for the next 5 years. Cash expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The company uses MACRS for depreciation. The machine is considered as a 3-year property and is not expected to have any significant residual value at the end of its useful years. Marc’s combined marginal income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments. A partial MACRS depreciation table is reproduced below. What is the TOTAL after-tax cash inflow in Year 1 from the proposed investment (rounded to the nearest thousand)?

The [term1] analysis is the widely used approach that managers use to recognize uncertainty about results of any models and to obtain an immediate financial estimate of the financial consequences of possible prediction errors due to the variance in the model factors/inputs. In the context of capital budgeting this means evaluating how sensitive are the capital budgeting decisions to various inputs such as tax rate, discount rate or timing of the cashflows (2 words, 1 point for each word, up to 2 points). (Hint: use the broadest term from the textbook that unites all potential techniques under this umbrella).

In my lectures I showed how to conduct “What-if sensitivity” analysis in Excel looking for the changes in the results, depending on the change of a single variable at a time. In particular, the exercise included the request in Excel to calculate a certain tax rate that would change the Net Present Value from an original amount to another precisely specified amount (e.g., $ 4,000). What was the name of the function that was used to conduct this type of sensitivity analysis?

The [term1] [term2] value of the project is the difference between the present value of future cash inflows and the present value of future cash outflows of an investment project (2 words, 1 point for each, up to 2 points).

The following table relates to two capital-budgeting projects of equal risk and reports the present value of the cashflows in the relevant periods. Which of the projects has the higher Profitability Index and will be selected if Profitability Index is used as the selection criteria?

Present value payback period is usually shorter than regular payback period.