The discounted cash flow approach to setting a bid price assumes the net present value of the project will be zero which means the internal rate of return will equal the required rate. The payback period must be less than the life of the project.The initial cash flow can be a positive value. For example, if a project reduced net working capital by an amount which exceeded the initial cost for fixed assets, the initial cash flow would be a positive amount.91. Explain how a manager can determine which cash flows should be included and which cash flows should be excluded from the analysis of a proposed project. Assume the analysis adheres to the stand-alone principle. AACSB TOPIC: REFLECTIVE THINKINGRoss - Chapter 010 #91SECTION: 10.1TOPIC: STAND-ALONE PRINCIPLE92. What is the formula for the tax-shield approach to OCF? Explain the two key points the formula illustrates. AACSB TOPIC: REFLECTIVE THINKINGRoss - Chapter 010 #92SECTION: 10.5TOPIC: DEPRECIATION TAX SHIELD93. What is the primary purpose behind computing the equivalent annual cost of two machines? What is the assumption that is being made about each machine? AACSB TOPIC: REFLECTIVE THINKINGRoss - Chapter 010 #93SECTION: 10.6TOPIC: EQUIVALENT ANNUAL COST94. Assume a firm sets its bid price for a project at the minimum level as computed using the discounted cash flow analysis presented in chapter 10. Given this, what do you know about the net present value, the internal rate of return, and the payback period for this project? AACSB TOPIC: REFLECTIVE THINKINGRoss - Chapter 010 #94SECTION: 10.6TOPIC: MINIMUM BID PRICE95. Can the initial cash flow at time zero for a project ever be a positive value? If yes, give an example. If no, explain why not. AACSB TOPIC: REFLECTIVE THINKING
96. Describe the procedure for setting a bid price and explain the manager's objective in setting this bid price. How is it that two different firms often arrive at different values for the bid price?
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