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In a review of a project with a large initial cash outflow followed by a few years of cash inflows that has a positive NPV, the cash inflows are shifted to 1 year later than originally predicted and the cost of capital used for discounting the project is reduced by 1%. What are the effects of these changes on the project NPV?
option : –
A cash flows – lower NPV, cost of capital – lower NPV
B cash flows – lower NPV, cost of capital – higher NPV
C cash flows – higher NPV, cost of capital – lower NPV
D cash flows – higher NPV, cost of capital – higher NPVIn future you must ask in the Ask the Tutor Forum if you want me to answer. This forum is for students to help each other 🙂
The further into the future the cash flows are the lower their present value will be because there is more interest when there are more years (and the discount factor is lower the more years).
If the cost of capital is lower the the present value is higher because there is less interest (and the discount factor is higher for lower interest rates).
This is really a Paper MA (was F2) question and so do watch my free Paper MA lectures on discounting if you are still unsure.
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