Problem 1:
(i) Each of the three project alternatives have a different indicator in favor.
Expected Value is in favor of Project B. However, this criterion involves assigning probabilities to certain outcomes which are most likely of a subjective nature.
Therefore, it makes it a poor criterion in real life circumstances.
Internal Rate of Return is higher than the cost of capital (10%) in all three project alternatives. IRR should not be used to rate mutually exclusive projects. This criterion favors Project A, which may also look attractive from the perspective of the lowest initial cash outflow requirement (at t = 0) amongst the three alternatives. Should the company have trouble with cash availability for initial investment, this should be the project to pursue.
As a rule of thumb, any project that results in a positive Net Present Value should be accepted. All of the three different alternatives have a positive NPV with the Project C having the highest one and most desirable one from this perspective. The highest NPV is in line with shareholders value maximization theory. In conclusion, the Project C should be pursued.

(ii) „…ultimate form of accelerated depreciation is always beneficial to companies.“
I agree that writing down capital expenditure is beneficial from the tax perspective. It gives an immediate relief to the corporate income tax base in the year in which the supposed cash outflow occurred, making the tax payable smaller and burdening less the tax expense and tax cash outflow.
„not necessarily true, but depends on the salvage value of the asset at the time it is sold“
In case a company sells an asset at a price above book value it most likely incurs a taxable income, depending on the type of asset. This scenario is favorable from the other revenue perspective which may make up for the business’s profitability overall. I agree that the salvage value of the asset at the time of selling is important from the tax perspective, however it is does not seem crucial for the companies’ benefit with an assumption that fixed assets are usually not bought with an intention of reselling them at salvage value, but rather to maximize the output of economic benefits.
„…depreciation method used by a firm is irrelevant, since depreciation is a non-cash expense, and therefore only affects accounting earnings.“ It is true that depreciation is a non-cash expense and it is irrelevant from cash planning perspective. However, I do not agree fully with this statement in the perspective of economy stimulation. Assuming that tax authorities allow the choice of different depreciation methods, this can directly affect the earnings and as a consequence the corporate income tax payble which in turn affects the cash outflow for tax payments. This allows companies for better expense, tax and consequently cash planing.
The Obama’s policy seems effective in the circumstances of low available credit and lack of investments in the marketplace. It was aimed at stimulating investments into non current, fixed assets such as infrastructure, means of production, equipment that was expected to generate future economical benefits for the company and the economy as a whole. The small companies may feel frustrated at times to have to pay „immediate cash“ for the asset or on short terms and then only to write it down for tax purposes over a certain number of years. Offering them such a tax incentive should have seemed attractive enough to stimulate investment.

(iii) The cost of capital of American Chemical (AC) after the acquisiton of Du Pont’s paper divison:
The student should first calculate the AC’s current WACC using the available information: D/V=35%, Kd=7.65% since it has a BBB bond valuation.
WACC = 7.65% * (1-0.35) *35% + 65% * Ke

Problem 1: MISCELLANEOUS TOPICS (25 points) The following question...