Concept Checks

5.1: capital expenses
R&D expenses, for most firms, are investments for the future. Thus, they should be treated as capital expenditures which are tax deductible. (The fact that the benefits are uncertain cannot make them operating expenses sice we could use the same rationale for most investments made by firms in risky businesses)

5.2: False
The capital expenditures and working capital needs may be large enough to offset the positive earnings.

5.3: would increase
Inventory operates as a drain on the cash flows.

5.4: the depreciation numbers from the tax books
We are interested in the cash flows generated by this project. Using the tax numbers gives us a more precise estimate of these cash flows.

5.5: would increase by $ 50 million
There would be have been a cash inflow, reflecting the new borrowing of $ 50 million, in that year.

5.6: No
It does mean that long term projects which generate cash flows earlier rather than later will be viewed as much more valuable. (Strictly speaking, the answer is yes, but the bias towards shorter term projects will reflect the cost of financing)

5.7: No. A positive NPV indicates a good project.
Even a small NPV is in excess of the hurdle rate. In this case, the positive NPV is over and above a hurdle rate of 15%.

5.8: No.
The cash flows will also grow faster, since the expected inflation used will be a higher number.

5.9: The NPV might go up or down, depending upon:
whether the cost of equity, with all equity, is greater than or lower than the cost of capital at its current mix. If the cost of equity is higher, the NPV will go down.

5.10: $12 million
The value of equity at Megatech dropped by 3% ($ 3 million). In effect, the market considered the $15 million price to be $ 3 million too high.

5.11: Yes.
It can be computed by setting the present value of the cash flows to $ 354.22 and solving for the discount rate. It would be a "weighted" average of the year-specific rates, similar to a YTM for a bond.

5.12: No.
If the cash flows are reversed, with positive cash flows up front and negative cash flows later, the NPV could go up as the discount rate is increased.