question archive Given a positive discount rate, which one of the following changes would increase the NPV of a project? Multiple Choice Reducing the amount of working capital that is needed
Given a positive discount rate, which one of the following changes would increase the NPV of a project? Multiple Choice Reducing the amount of working capital that is needed
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Given a positive discount rate, which one of the following changes would increase the NPV of a project?
Multiple Choice
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Reducing the amount of working capital that is needed.
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Spreading the total cash inflows over a longer time interval.
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Increasing the project's estimated expenses.
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Increasing the firm's opportunity cost of capital.
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| Reducing the amount of working capital that is needed would increase NPV. |
| This is because working capital is invested at beginning of project and recovered at end of the project. |
| Present value factors is high at beginning thus present value of cash outflow is higher |
| However present value factor is low at end of project thus present value of cash inflows is lower |
| Thus difference between PVCO and PVCI in relation to working capital would fall if work capital is reduced which would result in increase in NPV since NPV is PVCI - PVCO |
| Spreading the total cash inflows over a longer time interval would decrease NPV as present value of cash inflows would fall |
| Increasing the project's estimated expenses would decrease NPV since PVCO would increase |
| Increasing the firm's opportunity cost of capital. Would decrease PVCI |
| PVCO = Present value of cash outflows |
| PVCI = Present value of cash inflows |
| NPV = Net present value |
