Question

Theresa is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that the firm is considering is most likely to make the NPV positive? Consider each change independently

A) Increase the variable cost per unit

B) Increase the amount of the initial investment in net working capital

C) Decrease the fixed cost per period

D) Decrease the sales quantity

E) Decrease the sales price

Answer 1

Option (C) is correct

For making NPV positive, fixed costs per period should be decreased. NPV is the present value of future cash flows minus initial investment. So, if fixed cost per period is reduced, then it will increase the present value of future cash flows and therrby increasing the NPV.

Option (A) is incorrect as if variable cost per unit is increased then present value of cash flows will be decreased thereby decreasing NPV.

Option (B) is incorrect as if the amount of initial investment is increased then it will decrease the NPV.

Option (D) is incorrect as if sales quantity is decreased, then present value of cash flows will be decreased thereby decreasing NPV.

Option (E) is incorrect as if sales price is decreased, then present value of cash flows will be decreased thereby decreasing NPV.