Question

All else constant, the net present value of a typical investment project increases when: Group of...

All else constant, the net present value of a typical investment project increases when:

Group of answer choices

The cost of capital increases.

Each cash inflow is delayed by one year.

The initial investment of a project increases.

The cost of capital decreases.

All cash inflows occur during the last year of a project’s life instead of periodically throughout the life of the project.

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Answer #1

The cost of capital decreases

Net present value is calculated by subtracting initial investment from present value of cash inflows. Higher will be the present value of cash inflows, higher will be the net present value. These future cash inflows are discounted using cost of capital. There is an inverse relationship between present value of cash inflows and cost of capital. A decrease in cost of capital will increase the present value of cash flows which in turn will increase the net present value.

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