Question

In: Finance

_____2. If ABC Corporation invests $10,000 to purchase an asset with a net present value (NPV)...

_____2. If ABC Corporation invests $10,000 to purchase an asset with a net present value (NPV) of $3,000, which of the following would you expect to occur?

  1. The value of the corporation would rise by $10,000, the cost of the investment.
  2. The value of the corporation would rise by $10,000, the cost of the investment, but the value of the common stock would rise by only $3,000, the NPV of the investment.
  3. The values of both the corporation and its common stock would fall by $7,000, since the investment costs $10,000 but is only worth $3,000. Making this investment would destroy value of $3,000.
  4. The values of both the corporation and its common stock would rise by $3,000, the NPV of the investment.
  5. This is all very confusing. May I be excused?

Solutions

Expert Solution

The correct answer is Option D

The Net present value is the present value of all the cash flows less initial investments. The discount rate used is the cost of the capital. If the Net present value is Positive then it means that it will increase the value of the firm because it is the earnings of the firm from the project. Thus, the value of corporation and common stock will increase by $3000.

jeff jeffy answered 2 years ago
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