Asked by
Shaikha Almansoori
on Oct 25, 2024
Verified
Your firm is evaluating a potential investment in new machinery, but the manager in charge of the project uses an opportunity cost of capital that is too large. How does this error affect the projected net present value of the firm's investment?
A) NPV is overstated.
B) NPV is understated.
C) NPV is unaffected.
D) NPV changes from positive to negative.
Opportunity Cost
Cost associated with opportunities forgone when a firm’s resources are not put to their best alternative use.
Projected Net Present Value
An estimation of the present value of an investment's future net cash flows minus the initial investment cost.
Capital
Financial assets or the financial value of assets, such as cash or goods, used to generate income or wealth.
- Analyze the financial feasibility of projects using NPV and other investment decision-making tools.
- Understand the concept and implications of opportunity cost of capital in investment decisions.
Verified Answer
JH
Learning Objectives
- Analyze the financial feasibility of projects using NPV and other investment decision-making tools.
- Understand the concept and implications of opportunity cost of capital in investment decisions.