Acc 561 Week 4 Essay
Discussion Questions Week 4
Chapter 8 question 6.
A firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Briefly explain why such a firm would tend to become riskier over time.
Using the NPV to determine which projects to undertake leads to greater risk over time because best case scenario you can estimate the NPV in advance but the actual value of the project will not be known until completion. The true market value is unknown until the project is completed and the return is actually collected. NPV is based on the value of the dollar in today’s economy and does not take into account the future value of the dollar. Projects that develop rising cost and delays in production could end up being money losers in the long run (Emery, Finnerty, & Stowe, 2007).
Chapter 10 challenge question 14.
Phyllis believes that the firm should use straight-line depreciation for a capital project because it results in higher net income during the early years of the project’s life. Joanna believes that the firm should use the modified …show more content…
accelerated cost recovery system depreciation because it reduces the tax liability during the early years of the project’s life. Assuming you have a choice between depreciation methods, whose advice should you follow? Why?
Using straight-line depreciation provides the firm with tax benefits throughout the life cycle of the investment.
The investment is assigned a depreciation schedule that is used throughout the investments lifecycle. The investment is assignment a depreciation schedule that provides for the same amount of tax credits over the life span of the investment regardless of the depreciation schedule assigned. This method allows for better financial planning and consistent tax credits. The modified accelerated cost recovery system depreciation provides for reduced tax liabilities in the beginning however the depreciation schedule that is used changes year to year. This method does not provide for consistent financial planning (Emery, Finnerty, & Stowe,
2007).
Chapter 10 challenge question 16
Depreciation provides a sort of shield against taxes. If there were no taxes, there would be no depreciation tax shields. Does this mean that a project’s NPV would be less if there were no taxes?
Because taxes are non cash expenses, not incurring these would not affect the NPV. The NPV is the net present value of today’s cash flows. Taxes being a non cash expense item would not be included the NPV calculation (Emery, Finnerty, & Stowe, 2007). References
Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate Financial Management, Third Edition. Retrieved November 21, 2010, from https://ecampus.phoenix.edu/content/eBookLibrary2/content/eReader.as
Chapter 8 question 6.
A firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Briefly explain why such a firm would tend to become riskier over time.
Using the NPV to determine which projects to undertake leads to greater risk over time because best case scenario you can estimate the NPV in advance but the actual value of the project will not be known until completion. The true market value is unknown until the project is completed and the return is actually collected. NPV is based on the value of the dollar in today’s economy and does not take into account the future value of the dollar. Projects that develop rising cost and delays in production could end up being money losers in the long run (Emery, Finnerty, & Stowe, 2007).
Chapter 10 challenge question 14.
Phyllis believes that the firm should use straight-line depreciation for a capital project because it results in higher net income during the early years of the project’s life. Joanna believes that the firm should use the modified …show more content…
accelerated cost recovery system depreciation because it reduces the tax liability during the early years of the project’s life. Assuming you have a choice between depreciation methods, whose advice should you follow? Why?
Using straight-line depreciation provides the firm with tax benefits throughout the life cycle of the investment.
The investment is assigned a depreciation schedule that is used throughout the investments lifecycle. The investment is assignment a depreciation schedule that provides for the same amount of tax credits over the life span of the investment regardless of the depreciation schedule assigned. This method allows for better financial planning and consistent tax credits. The modified accelerated cost recovery system depreciation provides for reduced tax liabilities in the beginning however the depreciation schedule that is used changes year to year. This method does not provide for consistent financial planning (Emery, Finnerty, & Stowe,
2007).
Chapter 10 challenge question 16
Depreciation provides a sort of shield against taxes. If there were no taxes, there would be no depreciation tax shields. Does this mean that a project’s NPV would be less if there were no taxes?
Because taxes are non cash expenses, not incurring these would not affect the NPV. The NPV is the net present value of today’s cash flows. Taxes being a non cash expense item would not be included the NPV calculation (Emery, Finnerty, & Stowe, 2007). References
Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate Financial Management, Third Edition. Retrieved November 21, 2010, from https://ecampus.phoenix.edu/content/eBookLibrary2/content/eReader.as