A project requires an initial investment of $150.Your research generates the following estimates of revenues and costs:

The cost of capital equals 10%.Assume that the cash flows occur in perpetuity.What does a sensitivity analysis of NPV (without taxes)show? (Answers appear in order: [Pessimistic,Most Likely,Optimistic].)
A)50,-100,+400
B)-50,+300,+500
C)-100,+150,+350
D)+100,+150,+350

Question

A project requires an initial investment of $150.Your research generates the following estimates of revenues and costs:

The cost of capital equals 10%.Assume that the cash flows occur in perpetuity.What does a sensitivity analysis of NPV (without taxes)show? (Answers appear in order: [Pessimistic,Most Likely,Optimistic].)
A)50,-100,+400 
B)-50,+300,+500 
C)-100,+150,+350 
D)+100,+150,+350

Quizplus · Accepted Answer

The NPV calculations using the given estimates of revenues and costs are as follows:
- Pessimistic: NPV = -150 + (500/0.1) - (350/0.1^2) = -$100
- Most Likely: NPV = -150 + (300/0.1) - (150/0.1^2) = $150
- Optimistic: NPV = -150 + (400/0.1) - (100/0.1^2) = $350

Therefore, the sensitivity analysis of NPV shows that the project has a negative NPV in the pessimistic scenario and a positive NPV in the most likely and optimistic scenarios. The best choice would be to proceed with the project since the most likely and optimistic scenarios result in a positive NPV and the NPV exceeds the initial investment cost.

A Project Requires an Initial Investment of $150