Question

which one of the following statements is correct concerning net present value or NPV? please explain why

a) if cash flow of a project at time 0 is increased ny $100, the NPV of the project will increase by $100

b)the timing of the cash inflows has no effect on NPV of projrct

c) if cash inflows of a project can be received sooner, NPV of project will increase

d) if project has negative NPV at 9% discount rate, it will also have a negative NPV at 8%

Answer 1

Answer: C

NPV = Discounted cash inflows receiving in futures – Initial cash outflows

The period of inflows matter here – a 3^rd year inflow is bigger than 6^th year inflow for the same future value and with the same discount rate. This is called time value of money – money receiving today is much worthy than receiving it in future.

Therefore, “receiving sooner” amount would increase the discounted cash inflows and it gives more favorable NPV – it will increase.

Other options are not correct:

Option a: increase of inflow can’t increase NPV, since it appears as negative – actually it decreases NPV.

Option b: timing of cash inflows is very important – as discussed above.

Option d: if discount rate decreases (such as 9% to 8%), discounted cash inflows should increase. This may give positive NPV or less-negative NPV.