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

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

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

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

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Answer:

d.A shift from straight line to MACRS depreciation.

This is because, the under MACRS depreciation the depreciation in the initial years of project will be higher than that of straightline method of depreciation.

This will result in a greater cash inflow during the intial years (since depreciation is a non cash expense).

Greater initial cash inflows will have a greater weight while calculating NPV. (since discounting factor of initial years is greater than that of later years).

Remaining all the options, will lead to a decrease in NPV.

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