Question

In: Finance

Briefly explain why the following statement is true, false or uncertain. Suppose you are evaluating a...

Briefly explain why the following statement is true, false or uncertain.

Suppose you are evaluating a project such as a road where the annual benefits are increasing with calendar time. The present value (PV) of the investment costs of building the road is the same amount no matter when the road is built. In this case the net present value of the project will be increased if the date that the road is completed and ready for service is postponed.

Solutions

Expert Solution

Based on the information provided in the text, the statement appears to be "False".

_____

Explanation:

NPV is the difference between the present value of cash inflows and cash outflows. Only, when the present value of cash inflows exceeds the present value of cash outflows, the project is accepted. The concept of time value of money clearly states that the value of money/cash today is more than its worth in the future. The revenue from this type of project would arise only if the road is constructed and made ready for service as early as possible after the completion. So, any form of delay in and after the completion of the project would reduce the actual worth of money. Besides, costs such as basic maintenance would be required to keep the road in good condition after the completion, even if it is not made ready for use. Also, payments required to be made towards interest costs and loan amount (if any) obtained to execute the project would get delayed (if there is any postponement after completion). This would further bring down the actual worth of the project.

jeff jeffy answered 2 years ago
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