The [term1] [term2] of return is the estimated rate (i.e., percentage) that makes the discounted present value of future cash flows equal to the initial investment (2 words, 1 point for each word, up to 2 points).

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

The [term1] [term2] Simulation is an extension to scenario analysis in which a computer provides a distribution of possible outcomes, for example, project NPVs, based on repeated sampling from a distribution associated with one or more input variables in a decision model. (2 words, 1 point for each word, 2 points total)

The [term1] [term2] of return is the estimated rate (i.e., percentage) that makes the discounted present value of future cash flows equal to the initial investment (2 words, 1 point for each word, up to 2 points).

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).