Question

In: Accounting

as the minimum required rate of return increases for an investment project, the net present value...

as the minimum required rate of return increases for an investment project, the net present value if the project...

a. increase
b. does not change
c. decreases
d. becomes positive

Solutions

Expert Solution

Answer for this question is c decreases

it is rightly said that as the minimum required rate of return increases for the investment for the project the net present value of the project decreases it means npv @30% rate of return will be less than the npv at @20 %

it can also be understood from the following example where NPV @20% is $467000 and NPV @30% is $119250

YEAR CASH INFLOW TAKING PV @20% TAKING PV @30%
1 $        2,000,000 0.833 $        1,666,000 0.769 $        1,538,000
2 $        1,250,000 0.694 $            867,500 0.592 $            740,000
3 $            750,000 0.578 $            433,500 0.455 $            341,250
$        2,967,000 $        2,619,250
initial investment $        2,500,000 $        2,500,000
npv $            467,000 $            119,250
1 2000000 0.833 1666000 0.769 1538000
2 1250000 0.694 867500 0.592 740000
3 750000 0.578 433500 0.455 341250
2967000 2619250
initial investment 2500000 2500000
npv 467000 119250

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