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?

Question

Quizplus · Accepted Answer

Using a too-large opportunity cost of capital would result in a higher discount rate, leading to lower present values and ultimately a lower net present value. Therefore, the projected NPV is understated.

Your Firm Is Evaluating a Potential Investment in New Machinery