Jenna Kiragis

5/18/2014
FIN 534 Homework Chapter 11


Directions: Answer the following five questions on a separate document. Explain how you
reached the answer or show your work if a mathematical calculation is needed, or both. Submit
your assignment using the assignment link in the course shell. Each question is worth five points
apiece for a total of 25 points for this homework assignment.


1. Which of the following statements is CORRECT?
a. An example of an externality is a situation where a bank opens a new office, and
that new office causes deposits in the bank's other offices to decline.
b. The NPV method automatically deals correctly with externalities, even if the
externalities are not specifically identified, but the IRR method does not. This is
another reason to favor the NPV.
c. Both the NPV and IRR methods deal correctly with externalities, even if the
externalities are not specifically identified. However, the payback method does
not.
d. Identifying an externality can never lead to an increase in the calculated NPV.
e. An externality is a situation where a project would have an adverse effect on
some other part of the firm's overall operations. If the project would have a
favorable effect on other operations, then this is not an externality.


Explanation:
In Section 11.1f Externalities of our book, we learn that externalities are effects of a
project on other parts of the firm or on the environment (Brigham & Ehrhardt, 2014).
Answer A explains a Negative Within-Firm Externalities where a firm open up and the
traffic flow drops at the other firm.



2. Which of the following statement s is CORRECT?
a. If a firm is found guilty of cannibalization in a court of law, then it is judged to
have taken unfair advantage of its customers. Thus, cannibalization is dealt with
by society through the antitrust laws.
b. If cannibalization exists, then the cash flows associated with the project must
be increased to offset these effects. Otherwise, the calculated NPV will be biased
downward.
c. If cannibalization is determined to exist, then this means that the calculated NPV
if cannibalization is considered will be higher than the NPV if this effect is not
recognized.
d. Cannibalization, as described in the text, is a type of externality that is not
against the law, and any harm it causes is done to the firm itself.
e. If a firm is found guilty of cannibalization in a court of law, then it is judged to
have taken unfair advantage of its competitors. Thus, cannibalization is dealt with
by society through the antitrust laws.


Explanation:
In Section 11.1f Externalities of our book, we learn that cannibalization is a form of
Negative Within-Firm Externalities. The new business eats into the companys existing
business (Brigham & Ehrhardt, 2014). The book explains Apples iPod model. By
producing a newer model, the previous model is cannibalized. Therefore my answer D
explains that cannibalization is not against the law and the only harm done is to itself.



3. Which of the following statements is CORRECT?
a. Under current laws and regulations, corporations must use straight-line
depreciation for all assets whose lives are 5 years or longer.
b. Corporations must use the same depreciation method (e.g., straight line or
accelerated) for stockholder reporting and tax purposes.
c. Since depreciation is not a cash expense, it has no effect on cash flows and thus
no effect on capital budgeting decisions.
d. Under accelerated depreciation, higher depreciation charges occur in the early
years, and this reduces the early cash flows and thus lowers a project's projected
NPV.
e. Using accelerated depreciation rather than straight line would normally have no
effect on a project's total projected cash flows but it would affect the timing of the
cash flows and thus the NPV.


Explanation:
I choose answer E, because of section 11-2e Evaluating Project Cash Flows
(Accelerated Depreciation versus Straight-Line Depreciation). In this section, we learn
more about accelerated depreciation and its effects of other resources. The book gives an
example of accelerated depreciation versus straight-line depreciation and how it can
affect NPV (Brigham & Ehrhardt, 2014).



4. Which of the following statements is CORRECT?
a. Under current laws and regulations, corporations must use straight-line
depreciation for all assets whose lives are 5 years or longer.
b. Corporations must use the same depreciation method for both stockholder
reporting and tax purposes.
c. Using accelerated depreciation rather than straight line normally has the effect
of speeding up cash flows and thus increasing a project's forecasted NPV.
d. Using accelerated depreciation rather than straight line normally has no effect on
a project's total projected cash flows nor would it affect the timing of those cash
flows or the resulting NPV of the project.
e. Since depreciation is a cash expense, the faster an asset is depreciated, the
lower the projected NPV from investing in the asset.


Explanation:
I choose answer C, because of section 11-2e Evaluating Project Cash Flows
(Accelerated Depreciation versus Straight-Line Depreciation). The book gives an
example of accelerated depreciation versus straight-line depreciation and how it can
affect NPV (Brigham & Ehrhardt, 2014).



5. Which of the following statements is CORRECT?
a. Under current laws and regulations, corporations must use straight-line
depreciation for all assets whose lives are 3 years or longer.
b. If firms use accelerated depreciation, they will write off assets slower than they
would under straight-line depreciation, and as a result projects' forecasted NPVs
are normally lower than they would be if straight-line depreciation were required
for tax purposes.
c. If they use accelerated depreciation, firms can write off assets faster than they
could under straight-line depreciation, and as a result projects' forecasted NPVs
are normally lower than they would be if straight-line depreciation were required
for tax purposes.
d. If they use accelerated depreciation, firms can write off assets faster than they
could under straight-line depreciation, and as a result projects' forecasted NPVs
are normally higher than they would be if straight-line depreciation were required
for tax purposes.
e. Since depreciation is not a cash expense, and since cash flows and not
accounting income are the relevant input, depreciation plays no role in capital
budgeting.


Explanation:
From everything read about accelerated depreciation, I had to choose answer D because it
fit inline with the book. Section 11-2e Evaluating Project Cash Flows (Accelerated
Depreciation versus Straight-Line Depreciation) gives a nice detailed scenario about
using accelerated depreciation and how it affects taxes.

Brigham, E., & Ehrhardt, M. (2014). Financial management. (14th ed.). Mason, Ohio: Cengage Learning.