Capital budgeting question

The question where they asked about the change in NPV when the initial fixed capital investment changed, did you guys also adjust the depreciation tax shield throughout? It did say holding everything else constant, but I figured changing the initial investment would obviously change the depreciation amount.

That is a great observation. I didn’t consider that. I think you are correct.

you are correct, answer was something like 178k i think…

Correct, they exactly pushed on changes in tax shield from depreciation with this question. Don’t remember the figure, but it fitted one of the answers at 100%. I was surprised :slight_smile:

yes 178

I wrote on the exam, should someone actually view it, that I thought it was VERY poor wording. If you left “everything else unchanged” then its 250K, but if you take the depreciation into account, its $177K. Im sure they wanted $177K, but they worded in a manner that COULD be $250K.

then why hold all else constant??? what an annoying question

all else constant to me is all else constant…

what about the question regareding the terminal year from non operating cash flow - I figured the sale proceeds less the taxes but was the return of the working capital considered non-operating?

I had the same thought on depreciation vs. holding everything else constant. I didn’t adjust the dep for other years, but not sure what CFAI wanted.

I think return of wc is part of the operating…so I just treated the sale of assets minus tax as the terminal value.

jpm 351–depr. was referred to as a rate, not an amount. so if you kept the rate constant, you got 178.

I think I got 178 too. I am so glad that I had gotten caught just taking off the initial value in a CFAI text ens-of-chapter question and learned the lesson of the tax shield value. I think I just took the PV of N=5, Y=disc rt, FV=0, and PMT= [(250?)/5]*tax and subtracted from the 250?

so we were supposed to change the depreciation in this question along with the FC inv? that was for the CFAI texts - not the scweser goers then

it was after the fact, i got 178 then changed it to 250, i interpreted holding all else constant as depreciation from the last problem to remain constant

just a stupid question now that i think about it. i adjusted for depreciation so i got 178 or something (which i think is the correct answer). what’s the point in putting “holding all else constant”? very open to interpretation for choosing any of the 2 methods

No, holding all else constant doesn’t mean that you keep depreciation from the previous question. They were definitely looking for $178k there. They wanted to know if you realized that there was a depreciation tax shield.

my issue is, what is the point in putting a pointless statement like that in the question? just state that the initial outflow changes-- period.

Well clearly there was room for ambiguity on this one. I would imagine this question will be thrown out in the grading process. Thanks for your input.

i hope it isn’t thrown out because i got it right!!