When the net present value (NPV) of a project is calculated based on the assumption that the after-tax cash inflows occur at the end of the year when they actually occur uniformly throughout each year, the NPV will:
A) Not be in error.
B) Be slightly overstated.
C) Be unusable for actual decision-making.
D) Be slightly understated but probably usable.
E) Produce an error the direction of which is undeterminable.

Question

Quizplus · Accepted Answer

When cash inflows are assumed to occur at the end of the year rather than uniformly throughout the year, the NPV calculation does not account for the additional interest that could have been earned during the year. This results in a slight understatement of the NPV, but it is generally still usable for decision-making.

When the Net Present Value (NPV) of a Project Is