BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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True
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False, it will be less
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False, it will be more
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This cannot be determined
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Detailed explanation-1: -NPV is the value (in today’s dollars) of future net cash flow (R) by time period (t). To calculate NPV, start with the net cash flow (earnings) for a specific time period expressed as a dollar amount. Divide that by the product of 1 plus the discount rate or interest rate (i) expressed as a decimal.
Detailed explanation-2: -NPV can be calculated with the formula NPV = ⨊(P/ (1+i)t ) – C, where P = Net Period Cash Flow, i = Discount Rate (or rate of return), t = Number of time periods, and C = Initial Investment.
Detailed explanation-3: -The net present value: 1) decreases as the required rate of return increases. As the required rate of return increases, the project cash flows are discounted at a higher rate and hence the present value is decreased for each cash flow. This leads to a decreased NPV.