Which of the following statements regarding estimation errors in calculating NPV

Question

Which of the following statements regarding estimation errors in calculating NPV's is correct?

For short-term projects, an error in estimating the cash flows will result in a much larger error in the NPV than the same percentage error in the cost of capital.

For long-term projects, an error in estimating the cash flows will result in a much larger error in the NPV than the same percentage error in the cost of capital.

For short-term projects, an error in estimating the appropriate cost of capital will result in a much larger error in the NPV than the same percentage error in estimating the cash flows.

For long-term projects, it is more difficult to estimate the appropriate cost of capital to use than it is to estimate cash flows that are expected to occur in the distant future.

For short-term projects, an error in estimating the cash flows will result in a much larger error in the NPV than the same percentage error in the cost of capital.

For long-term projects, an error in estimating the cash flows will result in a much larger error in the NPV than the same percentage error in the cost of capital.

For short-term projects, an error in estimating the appropriate cost of capital will result in a much larger error in the NPV than the same percentage error in estimating the cash flows.

For long-term projects, it is more difficult to estimate the appropriate cost of capital to use than it is to estimate cash flows that are expected to occur in the distant future.

Explanation / Answer

A. For short-term projects, an error in estimating the cash flows will result in a much larger error in the NPV than the same percentage error in the cost of capital , NPV has much sensitivity for short term period because payment will be at end.

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