Your Firm Is Evaluating a Potential Investment in New Machinery

question 13

Multiple Choice

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.

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Definitions:

Trust

A fiduciary relationship where one party, known as the trustee, holds property or assets for the benefit of another party, called the beneficiary.

Beneficiaries

Individuals or entities designated to receive benefits or assets from an estate, insurance policy, or trust.

Securities

Financial instruments that represent an ownership position, a creditor relationship, or rights to ownership, such as stocks, bonds, or options.

Clayton Act

A federal law enacted to amend the antitrust laws of the United States, preventing unfair practices in commerce.