When determining the cash flow to assets, we start with net income, add back depreciation, add the change in net working capital, and subtract any…

  1. When determining the cash flow to assets, we start with net income, add back depreciation, add the change in net working capital, and subtract any capital expenditures to net income. Why are these changes made to net income?  

2.You have two friends who want to raise capital for a brewery. They’ve spent their savings develop- ing the idea, but they need a large amount of new capital to open a storefront and buy equipment. Banks have repeatedly denied their applications for large loans. They’ve approached wealthy family members and friends with very little luck. Why aren’t banks accepting their loan applications? If they’re willing to pay a high rate of return for funds, what’s another option you can suggest?

3.Assuming typical discount rates of less than 30 percent, rank the following from highest to lowest present value, and then briefly explain each one. (Hint: You shouldn’t have to make any calculations to determine the answer; think of the definitions of each.) O An ordinary annuity of five payments of $50

 An annuity due of five payments of $50

 A perpetuity of $50

4.Assume that a project has an internal rate of return of 21 percent and a discount rate of 20 percent. Would you expect the NPV of the project to be positive or negative? Should the firm accept the project? Discuss the resulting NPV when the IRR is below the discount rate and when the IRR is equal to the discount rate.

5.Recall the three different investment criterion: the payback period, net present value (NPV), and internal rate or return (IRR). Compare and contrast these techniques. How do we know when to accept or reject an investment? Discuss some advantages and disadvantages (if applicable) to each.

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