CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

The WACC for a capital project is 10%. The after-tax operating cash flows are $10,000 each year for the next 2 years. The project is expected to have a 2-year-life and 0 salvage value. The economic income of the project during year 1 is:
A. $9,091
B. $1,735
C. not enough information.
Explanation: Economic income (year 1) = Cash flow - Economic depreciation = CF1 - (V0 - V1).
CF1 = 10,000;
V0 = 10,000/1.101 + 10,000/1.102 = 17,355.
V1= 10,000/1.101 = 9,091.
Economic income (year 1) = 10,000 - (17,355 - 9,091) = 1,735.

User Contributed Comments 4

User Comment
heinzlive Or simply economic income = wacc * Beginning Value(NPV + initial outlay (here = 0))
=0,10*17.355,37 = 1.735
AGAZAPATOR The calculations regarding (V0-V1) arent the related to economic depreciation, as a change in market value of assets? I chose C then, because there wasnt enough info
tim2 Ah - I sort of get it. At the start the cash flows are worth 10000/1.1 +10000/1.1^2 and at the start of year2 they are worth 10000 +10000/1.1 so you are better off by the difference between them which is 1735
hks101 economic income = CF + change in MV
CF1 = 10,000
change in MV = (value of project in year 1) minus (value of project in year 0)
MV at year 0 = 17,355 (with 2 payment streams left)
MV at year 1 = 9,090 (with 1 payment stream left)
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