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famucpa
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Posted: 22 Jun 2010 at 20:08 \| IP Logged

The NPV of a project has been calculated to be 215k. Which one of the following changes in assumptions would DECREASE the NPV?

a. decrease estimated effective income tax rate

b. extend the project life and associated cash inflows

c.increase the estimated salvage value.

d. increase the discount rate

Correct answer is D.

I would think that if you Decreased the income tax rate, you would decrease your tax shield which would decrease your cash flows. Am i missing somethign?

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Alex2008
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Posted: 22 Jun 2010 at 20:38 \| IP Logged

If you decrease the tax rate your cash flows will increase because your earnings after tax will be more.

famucpa
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Posted: 22 Jun 2010 at 21:11 \| IP Logged

thanks. scratch that i was thinking way to hard. decreased taxes means more income.

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jmanwani
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Posted: 22 Jun 2010 at 21:37 \| IP Logged

also.. if discount rate goes to 15% from 10% u r assuming value of money now is 15% less than what it will be an from now..

so going up from 10 to 15%.. means increase the discount rate would decrease the npv..

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