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 145-146)
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 that the project's NPV is positive with proper discounting. (pages 146-147)
What does it mean to "separate investment and financing decisions?" Are interest payments treated as an expense in a standard NPV analysis? (page 149)
What is meant by "accelerated depreciation?" How does it contribute to project NPV? (page 151)
What are the chief components of net working capital? (pages 150-151)
Suppose a project forecast shows an increase in net working capital from $2 million in 2011 to $2.5 million in 2012. What are the possible reasons for the increase? (pages 152-153)
How does one convert the present value of a stream of cash outflows into an equivalent annual cost? (pages 154-155)
Machines M1 and M2 have the same operating costs, but M2 is 50% more expensive and will last twice as long before replacement. (pages 156-157)
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 158)
Give several examples of problems where you need to compare equivalent annual costs.
