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Provide an example of a “good” externality – that is, one that increases a project’s true...

Provide an example of a “good” externality – that is, one that increases a project’s true NPV over what it would be if just its own cash flows were considered.

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Answer #1

NPV- It is the net present value of a project that is calculated by comparing a projects' initial investment with its future expected discounted cash inflows. If NPV is positive then project is approved otherwise not.

Discounted cash flows are taken in the calculation of NPV. Future expected cash inflows are discounted to the present value factor to know so as to see the impact of time value of money.

Increase in NPV of a project- A project's NPV can be increased if lower discounted factor is used. Lower the present value factor, higher the NPV. Apasrt from that, timing of the cash inflows also affect the NPV of the project,change in interest rate that is used as present value factor also affects NPV.

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