#2 Suppose you calculate the Net Present Value (NPV) for a project, given the pr
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Question
#2
Suppose you calculate the Net Present Value (NPV) for a project, given the project cash flows and a required rate of return of 12%. After you calculate the NPV, you discover that the actual required rate of return is 14%. The new NPV you calculate using a required rate of return of 14% would be
a. lower than the NPV calculated with a required rate of return of 12%.
b. higher than the NPV calculated with a required rate of return of 12%.
c. the same as the NPV calculated with a required rate of return of 12%.
d. uncertain because it could be either lower or higher than the NPV calculated with a required rate of return of 12%.
a. lower than the NPV calculated with a required rate of return of 12%.
b. higher than the NPV calculated with a required rate of return of 12%.
c. the same as the NPV calculated with a required rate of return of 12%.
d. uncertain because it could be either lower or higher than the NPV calculated with a required rate of return of 12%.
Explanation / Answer
Answer=a. lower than the NPV calculated with a required rate of return of 12%.
This is explained with the help of this example-
Year Cash Flow project PV ractor (1/(1+r)^n) at 12% Project PV ractor (1/(1+r)^n) at 14% Present value with 12% Present value with 14% 0 $ (432,000.00) 1.00 1.00 $ (432,000.00) $ (432,000.00) 1 $ 40,500.00 0.89 0.88 $ 36,160.71 $ 35,526.32 2 $ 65,500.00 0.80 0.77 $ 52,216.20 $ 50,400.12 3 $ 82,500.00 0.71 0.67 $ 58,721.87 $ 55,685.15 4 $ 547,000.00 0.64 0.59 $ 347,628.39 $ 323,867.91 NPV $ 62,727.17 $ 33,479.50Related Questions
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