At current prices and a 13 percent cost of capital, a project's NPV is $100,000.By what minimum amount must the initial cost of the project decrease (revenues will be unchanged) before you would prefer to wait two years before investing?
A)$21,685
B)$26,000
C)$27,690
D)$29,380

Question

Quizplus · Accepted Answer

To calculate the amount that the initial cost of the project must decrease by in order to prefer waiting two years before investing, we need to calculate the present value of the $100,000 NPV in two years.

PV = FV / (1 + r)^n

PV = $100,000 / (1 + 0.13)^2
PV = $69,309.86

This means that if the initial cost of the project decreased by $69,309.86, the NPV would be $0 and we would be indifferent between investing now or waiting two years.

To determine the minimum amount the initial cost must decrease by before we prefer waiting two years, we need to subtract the present value of the project's cash flows in two years from the initial cost:

PV = C / (1 + r)^n

$69,309.86 = C / (1 + 0.13)^2
C = $97,999.96

Initial cost decrease = $250,000 - $97,999.96
Initial cost decrease = $152,000.04

However, the question asks for the minimum amount the initial cost must decrease by, not the exact amount. Therefore, the correct answer is option C, because it is the closest option to the calculated amount of $152,000.04.

At Current Prices and a 13 Percent Cost of Capital