Question

Let's say a corporation invests $60 million in projects with a total NPV of $20 million....

Let's say a corporation invests $60 million in projects with a total NPV of $20 million. Which of the following is correct, given this information?

Group of answer choices

The value of the firm should rise by $20 million, the amount of value created by those investments.

The value of the firm should fall by $40 million because those investments cost that much more than they are worth.

The value of the firm’s stock should rise by $80 million, the value of the new investments.

There is really no way to know how an investment, good or bad, will affect the firm’s value or the value of its equity.

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Answer #1

Answer : Correct Option is The value of the firm should rise by $20 million, the amount of value created by those investments.

Reason :

Net Present value is the difference of Present value Cash Inflow and Present Value of Cash Outflow.in Capital Budgeting Decision if the NPV of the project is positive then we will accept the project but if it is negative we will reject the project. In case of NPV the value of the firm rises by the NPV of the Investment. The value of the firm is sum of Net Present value of the different projects within the firm .

Therefore value of the firm should rise by $20 million i.e NPV of the investment, the amount of value created by those investments.

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