|
LOS h: Calculate and interpret accounting income and economic income in the context of capital budgeting.
Q1. Jackson Huang is an analyst for Oswald Technologies. Huang is considering a $150 million capital project that is expected to produce operating earnings before interest and taxes of $80 million per year for all three years of the project’s life. The project is being depreciated on a straight-line basis and at the end of 3 years the project will have zero salvage value. Huang believes the project is an average risk project for the firm and is planning to apply Oswald’s weighted average cost of capital (WACC) of 8% and tax rate of 30% to the project. Huang’s supervisor has asked him to use both the economic income and economic profit approaches to analyze the project. After completing his analysis, Huang makes the following statements to his supervisor.
Statement 1: In the first year of the project’s life, the economic income exceeds the economic profit generated from the project.
Statement 2: The discount rate applied to the economic profit to calculate the project’s net present value (NPV) will be identical to the economic rate of return earned by the project each year.
How should Huang’s supervisor respond to his statements?
A) Agree with one only.
B) Agree with both.
C) Agree with neither.
Q2. Firehouse Company is investing in a | 
发表于 2009-3-4 10:07
| 
