How Much Could NPV Be Affected by a Worst-Case Scenario

question 67

Multiple Choice

How much could NPV be affected by a worst-case scenario of 25 percent reduction from the $3 million in expected annual cash flows on a five-year project with 10 percent cost of capital?

• A)$2,843,090
• B)$3,750,000
• C)$4,578,825
• D)$6,155,274 $3 million x 25% = $750,000 annual reduction in cash flow
• Change in NPV = $750,000

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Definitions:

Initial Endowment

The initial quantity of goods, resources, or wealth that an individual or entity possesses at the start of a period or game.

Pareto Optimal

A distribution of resources from which it is impossible to reallocate in order to make any individual better off without making at least one individual worse off.

Initial Endowment

The initial quantity of assets, goods, or resources that an agent or economy possesses at the start of a period.

Competitive Equilibrium

A state in a market where supply equals demand, and no participant has the ability to influence prices.