Why should the financial manager include opportunity costs, but ignore sunk costs when evaluating a proposed capital investment? Give an example of each case. (pages 115-116 of the book)
Suppose a forgetful manager makes the mistake of discounting nominal project cash flows at a real discount rate. Inflation is projected at 4% per year. Does the manager overestimate or underestimate NPV? Assume the project's NPV is positive with proper discounting. (pages 116-118 of the book)
What does it mean to "separate investment and financing decisions?" Are interest payments treated as an expense in a standard NPV analysis? (page 120 of the book)
What is meant by "accelerated depreciation?" How does it contribute to project NPV? (page 121 of the book)
What are the chief components of net working capital? (pages 120-121 of the book)
Suppose a project forecast shows an increase in net working capital from $2 million in 2008 to $2.5 million in 2009. What are the possible reasons for the increase? (pages 120-121 of the book)
How does one convert the present value of a stream of cash outflows into an equivalent annual cost? (pages 125-126 of the book)
Machines M1 and M2 have the same operating costs, but M2 is 50% more expensive and will last twice as long before replacement. (pages 128-129 of the book)
Outline the calculations required to choose between M1 and M2.
Suppose the purchase costs of machines like M1 and M2 are declining at 5% per year. How would this affect your calculations? Would the decline in costs make machine M1 a more attractive investment?
Should equivalent annual costs be computed in real terms or nominal terms—or can you use either method? Explain briefly. (page 128 of the book)
Suppose a capital investment can be made now or at any time in the next five years. If we assume away risk and uncertainty, what is the rule for deciding when to invest? (pages 131-132 of the book)
Give several examples of mutually exclusive projects. (pages 126-133 of the book)
