In: Accounting
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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