NPV problem and Depreciation problem?

1. Your firm is considering building a new office complex. Your firm already owns land suitable for the new complex. The current book value of the land is $100,000; however, a commercial real estate agent has informed you that an outside buyer is interested in purchasing this land and would be willing to pay $650,000 for it. When calculating the net present value (NPV) of your new office complex, ignoring taxes, the appropriate incremental cash flow for the use of this land is:

Question 7 options:

A) $650,000 inflow

B) $0

C) $100,000 outflow

D) $650,000 outflow

2. Which of the following best explains why is it sensible for a firm to use an accelerated depreciation schedule such as MACRS rather than straight-line depreciation?

Question 6 options:

A) The firm will substantially decrease its depreciation tax shield across all of the depreciation timeline.

B) The firm can decide over how many years an item may be depreciated, thus allowing it full control of its depreciation expenses.

C) The firm will have substantially fewer depreciation expenses later in the depreciation timeline.

D) The firm will receive greater benefits to its cash flow earlier in the depreciation timeline and thus increase net present value (NPV).

I think the answers are A and D. Any help would be appreciated!

1 Answer

  • JKRB
    Lv 7
    7 years ago
    Best Answer

    I believe both answers should be (D). For question #1, when NPV is calculated, the PVs of the inflows of cash should be more than the initial investment in order to go ahead with a project. There is no initial investment given; however, the firm would be giving up $650,000 if they decided to go ahead with the project. So this should be calculated into the NPV as an initial cash outflow in order to see if the value of the project is worth more than just selling the land. .

    Source(s): Accounting Fan
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