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What happens to NPV when cost of capital increased?
NPV decreases when the cost of capital is increased.
What happens to NPV if the cost of capital changes?
The cost of capital is inversely proportional to the NPV. As capital costs increase (i.e. the interest rate increases), NPV decreases. As capital costs decrease (i.e. the interest rate decreases), NPV increases. You can see the relationship in the following equation: NPV = a * ((1+r)^y - 1)/(r * (1+r)^y) Where: NPV = Net Present Value (The present value of a future amount, before interest earnings/charges) a = Amount received per year y = Number of years r = Present rate of return
Does lower WACC equal lower NPV?
no it increases npv
Does the npv of future cash flows increase or decrease as the discount rate increases?
NPV decreases with increasing discount rates.
The NPV assumes cash flows are reinvested at the?
The NPV assumes cash flows are reinvested at the: A. real rate of return B. IRR C. cost of capital D. NPV
Calculate rate of return?
NPV/Initial Cost of Investment
Why the NPV of a relatively long term project is more sensitive to changes in the cost of capital than is the NPV of a short term project?
due to the uncertainty
Equipment A has a cost of Rs75000 and net cash flow of Rs20000 per year for six years A substitute equipment B would cost Rs50000 and generate net cash flow of Rs14000 per year for six years?
Equipment A NPV = 75000 - 120000 = 45000 Equipment B NPV = 50000 - 84000 = 34000 Based on NPV Equipment A should be selected
Difference between Sensitivity analysis and Scenario analysis?
Scenario Analysis: What happens to the NPV unde different cash flow scenarios? this analysis has: 3 dimensions to measure 1. Best case: High revenues, low cost 2. Worst case: low revenues, high cost 3. Base case: calculation with the given data Measure of the range of possible outcomes Best and Worts are not necessarily probable, but they can still be possible Sensitivity Analysis: What happnes to NPV when we vary one variable at a time? This is a subset of scenario analysis where we are looking at the effect of speciic variables on NPV The greater the volatility on NPV in relation to a specific variable, the larger the forecasting risk associated with that variable, and the more attention we want to pay to its estimation i.e. number of scenario analysis done, let's say 1,000 of different NPV, and the empirical distribution made us better off. Because we have observe the how volatile is the NPV.
What if your firm is considering a project that will cost 4.55 million upfront generate cash flows of 5 million per year for three years and then have a cleanup and shutdown cost of 6 million in the f?
Your firm is considering a project that will cost $4.55 million upfront, generate cash flows of $5 million per year for three years, and then have a cleanup and shutdown cost of $6 million in the fourth year. Assume a discount rate of 10% per annum, what is the NPV of this project? a. None of the other answers are true. b. The NPV of this project is $3.44 million. c. The NPV of this project is $3.34 million. d. The NPV of this project is $10.89 million.
What are the formulae involving the calculation of flotation cost?
Your company is considering a project that will cost $1 million.The project will generate after-tax cash flows of $250,000 per year for 7 years. The WACC is 15% and the firm's target D/E ratio is .6 The flotation cost for equity is 5% and the flotation cost for debt is 3%. What is the NPV for the project after adjusting for flotation costs? fA = (E/V) x fE + (D/V) x fD fA = (.375)(3%) + (.625)(5%) = 4.25% PV of future cash flows = 1,040,105 NPV = 1,040,105 -1,000,000/(1-.0425) = -4,281
If the opportunity cost of capital for a project exceeds the projects IRR then the project has a NPV negative?
If the opportunity cost of capital for a project exceeds the Project's IRR, then the project has a(n)
