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Death By Bagel is considering a new project. Which one of the following scenarios will increase...

Death By Bagel is considering a new project. Which one of the following scenarios will increase the net present value of the project?

A. a reduction in the final cash inflow

B. a deferment of some cash inflows until a later year

C. an increase in the required rate of return

D. an increase in the initial capital requirement

E. an increase in the aftertax salvage value of the fixed assets

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Answer #1

E. an increase in the aftertax salvage value of the fixed assets

Net present value is calculated by subtracting present value of cash inflows minus present value of cash outflows. An increase in after tax salvage value will increase the cash INFLOW which will lead to a higher NPV. Reduction in final cash inflow will decrease the cash inflow. An increase in initial capital requirement will increase the cash OUTFLOW which will lead to a lower NPV. Deferment of some cash inflows will reduce their present value which will lead to a lower NPV. An increase in required rate of return will lead to a lower present value of cash inflows as required rate is used in the denominator to calculate the present value of cash inflows.

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