Question

Suppose a project generates positive cash flows for the next 12 years and the project’s NPV...

Suppose a project generates positive cash flows for the next 12 years and the project’s NPV is $110,000 when discount rate is 6%. Also suppose that the IRR=8.7%. Which of the following may be a possible value for NPV when discount rate is 7.4%?

A. -$25,000

B. 0

C. $25,000

D. $125,000

E. None of the above

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Answer #2

Discount Rate is the rate used to find out the present value of cash flows that are expected to occur in future.The cash flows are discounted back to the present time. The discount rate used is often the WACC (weighted average cost of capital) of the company.
NPV = -C0 + C1/(1+r) + C2/(1+r)2 + ............ Cn/(1+r)n

Possible vaue of NPV when Discountig rate is 7.4% (step by step)
1. When discount rates go up, the annuity factor increases.

2. Due to increase in annuity factor, the denominator of each fraction goes up.

3. The present value of each cash flow decreases

4. The NPV will come down.

Possible value: 25,000 ( 0 and -25,000 can't be possible values because IRR > Discounting rate)  

answered by: anonymous
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