Investment Analysis Flashcards

Equipment costs $100,000, has a $10,000 salvage value, and a 5-year useful life. What is the annual straight-line depreciation?

Answer: $18,000

($100,000 − $10,000) / 5 = $18,000 per year.

Annual depreciation on a purchased asset is $18,000 and the firm's tax rate is 25%. What is the annual depreciation tax shield?

Answer: $4,500

Tax shield = depreciation × tax rate = $18,000 × 25% = $4,500.

Which is a common advantage of leasing equipment rather than purchasing it?

Answer: Preserves capital and reduces exposure to technological obsolescence

Leasing conserves cash and shifts obsolescence risk, though it is not always the cheapest option.

In a lease-versus-buy analysis, the most appropriate way to compare the two options is to:

Answer: Compare the present value of after-tax costs of each option

Discounting after-tax cash flows of leasing and buying puts both options on an equal economic basis.

Which set of costs is included in a total cost of ownership (TCO) analysis for a capital asset?

Answer: Acquisition, operating, maintenance, and disposal costs

TCO captures all costs over the asset's life, from acquisition through end-of-life disposal.

A company uses idle warehouse space for a new project instead of renting it out for $30,000 per year. How should the forgone rent be treated in the investment analysis?

Answer: Included as an opportunity cost

Forgone income from the next-best use of a resource is a relevant opportunity cost.

How does an expected salvage value at the end of an asset's life affect the asset's NPV?

Answer: It increases NPV as a terminal cash inflow

Salvage proceeds are a cash inflow in the final year, which raises NPV.