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which of the following changes would result in the highest present value for a series of cashflows
a. a 100 decrease in taxes each year for 4 years
b. a 100 decrease in cash outflow for 3 years
c. a 100 increase in disposal value at the end of 4 years
d. a 100 increase in cash inflow each year for 3 yearsthe correct answer given is A.
i ruled out C for obvious reasons.
for B,C both result in 75 increase given a 10% cost of capital
for A the result is 68 increase given a 10% cost of capitalso, for me, this was a toss up type of a question, or else i did not understand what the question was asking.
can u pls explain
question is from becker kit
Your workings are wrong.
A is 100 decrease each year for 4 years – an annuity.
So the increase in the NPV if the cost of capital is 10% is 100 x 3.170 = 317.B is again a 100 decrease each year for 3 years – again an annuity.
So the increase in the NPV is 100 x 2.487 = 248.7(However between these two, you don’t need to do any calculations – 100 a year for 4 years must be better than 100 a year for 3 years)
C and D must be worse than A because they both have simply one receipt of 100 (after either 4 years or 3 years). (However, D must be better than C, whatever the cost of capital, because it is receivable sooner)
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