For this question, assume a typical pattern of cash flows; that is, cash outflow

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       For this question, assume a typical pattern of cash flows; that is, cash outflows (negative) in the beginning of the project, followed by cash inflows (positive) in the later years. In other words, you basically pay for the project up front, then reap the benefits in later years. (It is possible, of course, for a project to provide early benefits, but you pay later.) Also, assume that the depreciation in one of the choices refers to TAX depreciation (which affects the timing of tax cash flows), not necessarily to "accounting" or "book" depreciation (which has no effect on cash flow). MACRS stands for "Modified Asset Cost Recovery System", which is a US federal income tax term for accelerated depreciation.

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Other things held constant, which of the following would increase the NPV of a project being considered?

a. The project would decrease sales of another product line. b. Making the initial investment in the first year rather than spreading it over the first three years. c. An increase in required net operating working capital. d. An increase in the discount rate associated with the project. e. A shift from straight-line to MACRS depreciation.

Explanation / Answer

e. A shift from straight-line to MACRS depreciation.

since all the other factors naturally decrease the NPV.
a is hypothetical as it does not describe whether it would increase cash flow of proposed project

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