An international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return.a. positively; positivelyb. positively; negativelyc. negatively; positivelyd. negatively; negatively
Question
An international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return.a. positively; positivelyb. positively; negativelyc. negatively; positivelyd. negatively; negatively
Solution
The correct answer is b. positively; negatively.
Here's why:
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The Net Present Value (NPV) of a project is calculated by subtracting the initial investment from the present value of future cash flows. Therefore, if the initial investment is larger, the NPV will be smaller, all else being equal. This means that the NPV is negatively related to the size of the initial investment.
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The required rate of return is the discount rate used in the NPV calculation. A higher discount rate reduces the present value of future cash flows, which in turn reduces the NPV. Therefore, the NPV is negatively related to the project's required rate of return.
So, the NPV is negatively related to both the size of the initial investment and the project's required rate of return.
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