-If the Cost of Goods decreases and all other factors remain the same then: NPV
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Question
-If the Cost of Goods decreases and all other factors remain the same then:
NPV will remain the same
Not enough information
NPV will increase (Explain why this is the correct answer)
NPV will decrease
-Milson Company is considering the purchase of ABC Company at a price of $190,000. If Milson makes the acquisition, its after tax cash flows will increase by $30,000 per year and remain at this new level forever. If the company MARR is 15%, should Milson buy ABC Company?
Yes, because the NPV = $30,000
Yes, because the NPV = $200,000
Yes, because the NPV = $10,000 (explain why this is the correct answer)
No, because NPV < 0
There is not enough information given to answer this question
-Consider a project with an initial outflow at time 0 and positive cash flows in all subsequent years. As the discount rate (MARR) is increased then
IRR remains constant while the NPV decreases (explain why this is the correct answer).
IRR increases while the NPV remains constant
IRR decrease while the NPV decreases
IRR remains constant while the NPV increases
IRR decreases while the NPV remains constant
NPV will remain the same
Not enough information
NPV will increase (Explain why this is the correct answer)
NPV will decrease
Explanation / Answer
1. If the Cost of Goods decreases and all other factors remain the same then NPV will increase. Cost of goods sold (COGS) is considered as an expense in the income statement. So, if expenses are going down it means our cash outflow is decreasing.
NPV = Present value of cash inflow - Present value of cash outflow.
Lets take an example if there are two scenarios A and B. In Scenario A the Present value of cash inflow is $1000 and present value of cash outflow is $800. In scenario B Present value of cash inflow is $1000 and present value of cash outflow is $600.
The NPV in Scenario A is $200
In Scenario B NPV is $400.
What happened here? The NPV increased.
2. PV for an infinite cash flow = cash flow/i
here the cash flow is 30,000
and i is the rate of return which is 15%.
30,000/0.15 = 2,00,000
NPV = PV of cash inflow - PV of cash outflow
NPV = 2,00,000-1,90,000 = $10,000
3. IRR is the rate that makes the NPV equal to zero IRR will remain constant because it does not depend upon discount rate.
NPV is the present value of the cashinflows minus outflows for a project, if the discount rate is increased then NPV will decrease.
Take the example
Cash inflow = 1,00,000 for 5 years
Cash outflow = 10,000
if rate of return is 10% the NPV =369079
if rate of return is 20%=289061
if rate of return is 30% =233557
So NPV is decreasing while IRR will remain constant.
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