A Project Has an Initial Investment of 100 Suppose the Cash Flows Are Perpetuities and the Cost of Up

question 25

Multiple Choice

A project has an initial investment of 100.You have come up with the following estimates of the project's cash flows (there are no taxes) : $\begin{array} { | l | c | c | c | } \hline & \text { Pessimistic } & \text { Mast Likely } & \text { Optimistic } \\\hline \text { Revenues } & 15 & \mathbf { 2 0 } & \mathbf { 2 5 } \\\hline \text { Costs } & 10 & 8 & 5 \\\hline\end{array}$ Suppose the cash flows are perpetuities and the cost of capital is 10 percent.Conduct a sensitivity analysis of the project's NPV to variations in revenues.(Answers appear in order: [Pessimistic, Most Likely, Optimistic].)

• A)-30, +20, +70.
• B)-100, -50, +80.
• C)-50, +50, +70.
• D)+5, +11, +18.

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Definitions:

Net Present Value

A method used in capital budgeting to evaluate the profitability of an investment or project, calculated by discounting all cash flows to their present value using a specified discount rate.

Future Cash Inflows

Expected receipts of cash in the future from various sources, including operations, investments, and financing activities.

Rate of Return

The profit or loss of an investment over a particular period, represented as a proportion of the initial investment amount.

Employee Morale

The overall outlook, attitude, satisfaction, and confidence that employees feel at work.