For a tax-paying firm,the net present value of a project will increase when:
A)the initial net working capital requirement increases.
B)depreciation is decreased during the early years of a project's life.
C)the life of the fixed assets used by that project is increased.
D)the operating cash flows increase.
E)the tax rate increases.

Question

Quizplus · Accepted Answer

The net present value of a project is primarily determined by the cash flows generated by the project. Therefore, if the operating cash flows increase, the net present value of the project will also increase. The other options (A, B, C, and E) are likely to decrease the net present value of the project. For example, increasing the initial net working capital requirement or decreasing the amount of depreciation will increase the upfront costs of the project, reducing its net present value. Similarly, increasing the life of the fixed assets or increasing the tax rate may lead to higher taxes, which will reduce the net cash flows and hence the net present value of the project.

For a Tax-Paying Firm,the Net Present Value of a Project