Question

question 21
which of the following will increase net present value?
an increase in the discount rate
speeding up the receipt of future cash inflows
a lower discount rate coupled with a lower future cash inflow
none of these

Explanation:

• For "An increase in the discount rate": The net present value (NPV) formula is \( NPV=\sum_{t = 0}^{n}\frac{CF_t}{(1 + r)^t}\), where \(CF_t\) is cash flow at time \(t\) and \(r\) is the discount rate. An increase in \(r\) will decrease the present value of future cash flows, thus decreasing NPV.
• For "Speeding up the receipt of future cash inflows": If we receive cash inflows earlier, the time period \(t\) in the present - value formula \(PV=\frac{CF}{(1 + r)^t}\) decreases. A smaller \(t\) leads to a larger present value for the same cash flow \(CF\) and discount rate \(r\). So speeding up cash inflows increases the present value of those inflows, which in turn increases NPV.
• For "A lower discount rate coupled with a lower future cash inflow": Although a lower discount rate tends to increase the present value of cash flows, a lower future cash inflow may offset this positive effect or even lead to a lower NPV overall.

Answer:

B. Speeding up the receipt of future cash inflows