Question 1. Which of the following should be treated as incremental cash flows when deciding whether to invest in a new manufacturing plant? The site is already owned by the company, but existing buildings would need to be demolished. Explain please
a. The market value of the site and existing buildings
b. Demolition costs and site clearance
c. The cost of a new access road put in last year
d. Lost earnings on other products due to executive time spent on the new facility
e. A proportion of the cost of leasing the president's jet airplane
f. Future depreciation of the new plant
g. The reduction in the corporation's tax bill resulting from tax depreciation of the new plant
h. The initial investment in inventories of raw materials
i. Money already spent on engineering design of the new plant
Question 2. Each of the following statements is dangerous or misleading. Explain why.
a. A long-term United States government bond is always absolutely safe.
b. All investors should prefer stocks to bonds because stocks offer higher long-run rates of return.
c. The best practical forecast of future rates of return on the stock market is a 5- or 10-year average of historical returns.