[koolerz]

I need help with this question…

The net present value of a project has been calculated to be $215,000. Whihc one of the following changes in assumptions would decrease the NPV?

a. Decrease the estimated effective income tax rate

b. Extend the project life and assoicated cash inflows

c. Increase the estimated salvage value

d. Increase the discount rate

correct answer is d…

I thought a is also correct… Anyone can explain? Thanks.

FAR - 95, BEC - 86, AUD - 97, REG - 99

[Anonymous]

If you decrease the effective tax rate your expected taxes related to the project will be lower which in turn increases the NPV. NPV would decrease if the effective rate increased.

For example, suppose you have a one period NPV formula as follows: NPV = C(1 – r)/(1 + d) where ‘C' = the expected cash flow, ‘r' = the effective tax rate, and ‘d' = the discount rate. As ‘r' decreases the numerator becomes larger, which increases the NPV. Assume C = 100,000, r = 5%, and d = 10%; the resulting NPV = $86,364. If you change ‘r' to 2% and leave everything else the same the resulting NPV is $89,091.

[NJCPA2B]

I don't know, but I would've guessed “b”

BEC=77, FAR=78, REG=73,74,80, AUD=70,69, 84 DONE!

[Author]

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