5) Most firms generate cash inflows every day, not just once at the end of the year. In capital

budgeting, should we recognize this fact by estimating daily project cash flows and then

using them in the analysis? If we do not, will this bias our results? If it does, would the

NPV be biased up or down? Explain.

6) In theory, market risk should be the only relevant risk. However, companies focus as

much on stand-alone risk as on market risk. What are the reasons for the focus on the stand-

alone risk?

7) Allen Air Lines must liquidate some equipment that is being replaced. The equipment

originally cost $12 million, of which 75% has been depreciated. The used equipment can

be sold today for $4 million, and its tax rate is 40%. What is the equipments after-tax net

salvage value?

8) Although the Chen Companys milling machine is old, it is still in relatively good working

order and would last for another 10 years. It is inefficient compared to modern standards,

though, and so the company is considering replacing it. The new milling machine, at a

cost of $110,000 delivered and installed, would also last for 10 years and would produce

after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It

would have zero salvage value at the end of its life. The firms WACC is 15%, and its

marginal tax rate is 35%. Should Chen buy the new machine?