1. The present value of a perpetual tax shield increases as the firm’s tax rate _____ and the amount of principal _____

a. Increases; increases

b. Increases; decreases

c. Decreases; decreases

d. Decreases; increases

2. Net working capital is expected to increase by $25,000 over the 5-year life of a project. What is the effect of net working capital on the project’s net present value if the cost of capital is 15%?

a. NPV will not be affected because the $25,000 will all be recouped.

b. NPV will increase by $12,429.42.

c. NPV will decrease by $25,000.

d. NPV will decrease by $12,570.58.