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# Value of Cash Flow Declines

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The value of cash flow will decline if ____________________:

i.) the discount rate rises
ii.) the cash flow occurs closer in time
iii.) compounding frequency rises
iv.) its level of risk rises

a) i. and ii. Only
b) i. and iii. Only
c) ii and iii only
d) iii and iv only
e) I, iii and iv only

Suppose a project will increase the investment inventory by 10,000, decrease accounts payable by 5000 and decrease prepaid assets by 2500 as soon as the project starts. The form used a 12% as the discount rate.. Further, it is assumed that the investment in working capital is recovered after three years at the end of the project. What is the impact of working capitol in computing the NPV?

a) cash flow decreases by 12,500
b) cash flow increased by 12,500
c) cash flow decreased by 1727
d) cash flow increased by 1339
e) cash flow decreased by 1339

#### Solution Preview

The value of cash flow will decline if ____________________:

i.) the discount rate rises
ii.) the cash flow occurs closer in time
iii.) compounding frequency rises
iv.) its level of risk rises

a) i. and ii. Only
b) i. and iii. Only
c) ii and iii only
d) iii and iv ...

#### Solution Summary

The value of cash flow declines are discussed. The discount rising rates are determined.

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## Effects of straight-line versus double declining-balance depreciation

Same Day Laundry Services purchased a new steam press January 1, for \$35,000. It is expected to have a five-year useful life and a \$3,000 salvage value. Same Day expects to use the steam more extensively in the early years of its life.

Required

a. Calculate the depreciation expense for each of the five years, assuming the use of straight-line depreciation.

b. Calculate the depreciation expense for each of the five years, assuming the use of double-declining-balance depreciation.

c. Would the choice of one depreciation method over another produce a different amount of cash flow for any year? Why or why not?

d. Assume that Same Day Laundry Services sold the steam press at the end of the third year for \$20,000. Compute the amount of gain or loss using each depreciation method.

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