ANS: B from Chapter 8 The project?s NPV is $500,000 today. One year from today, with the project?s initial cost $50,000 lower, project NPV will rise to $550,000 Two years from today, with the project?s initial cost $100,000 lower, project NPV will rise to $600,000 Three years from today, with the project?s initial cost $150,000 lower, project NPV will rise to $650,000 The objective is to compare the 4 NPV values to determine when to start the project (which year has the highest NPV). However, to make this comparison, all the NPVs must be in today?s dollars. Thus: NPV today is $500,000 PV of NPV 1 year from today is $502,283 ( = 550000 / 1.095) PV of NPV 2 years from today is $500,406 ( = 600000 / 1.095^2) PV of NPV 3 years from today is $495,075 ( = 650000 / 1.095^3) Waiting 1 year to launch the project has the highest NPV in today?s dollars.Note 43 the highest NPV dollars. Note that assuming the PV of the project?s future after-tax cash flows remains constant is the same as assuming the project?s nominal after-tax cash flows remain constant. rives_4 Microsoft PowerPoint - BFIN 620 Practice Exam Questions WI2010 MAR102010.ppt [Compatibility Mode]
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