Question

In a discounted cash flow analysis, what happens to the NPV, if, all else being equal, the discount rate goes up? What happens to NPV if the growth rate for the terminal value (perpetual growth rate) rises?

Answer 1

Net present value or NPV= -Initial outlay + Present value of future cash flows.
Present value and discount rate are inversely related. When the discount rate goes up, the present value of future cash flows decreases and vice versa.

Answer: Hence, all else being equal, if the discount rate goes up the present value of future cash flows will decrease and thus the NPV will also decrease.

Terminal value=(Final period cash flow)*(1+ Growth rate)/(Discount rate - Growth rate)
From the equation we can see that an increase in the growth rate will increase the terminal value. This terminal value is discounted while calculating the NPV.
Answer: Hence, the increase in terminal value will increase the NPV.