1.You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $1500 initially, and then $400 per year in maintenance costs. Machine B costs $2000 initially, has a life of three years, and requires $300 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine.

Which is the better machine for the firm? The discount rate is 6% and the tax rate is zero.

2. What is the basic principle of finance that can be applied to the valuation of any investment?

3. What is the decision rule for the net present value technique? Briefly explain them.

4. An investment that costs $30,000 will produce annual cash flows of $10,000 for a period of 4 years. Given a desired rate of return of 8%, the investment will generate

5. As the discount rate becomes higher and higher, the present value of inflows approaches

6. How are the operating and cash cycles of the firm different? Why are they important?

7. Why do we use leverage if it increases the risk of a firm?

8. How important is it to trace costs appropriately?

9. What is cost volume profit analysis?

10. Under what circumstances is it appropriate to use the target cost concept?