9. Assume that the discount rate is greater than zero. Which of the followine wi
ID: 2547851 • Letter: 9
Question
9. Assume that the discount rate is greater than zero. Which of the followine wit nt project? will have the largest dollar effect on the net present value of a 10-year investmhave th a) a decrease of $20,000 in both the initial investment required to start the b) c) a decrease of $2,000 in the annual cash inflows from this project. project and expected salvage value in 10 years. a decrease of $20,000 in the initial investment required with no effect on the salvage value in 10 years. Incre Give d) a decrease of $20,000 in the expected salvage value in 10 years with no effect ontde Ela initial investment.Explanation / Answer
Answer is b. a decrease of $20,000 in initial investment required with no effect on the expected salvage value in 10 years.
Explanation:
The Decrease in initial investment of $20,000 in Year-0 will have an effect of increasing the NPV by same amount (as the PVF in Year -0 will be 1). However, in all other cases, the same amount of $20,000 will have a lesser effect due to multiplication of PV factor of their respective years.
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