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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Why is the NFV of a relatively long-term project (one for which a high percentage of its cash flows occurs in the distant future) more sensitive to changes in the WACC than that of a short-term project?

Summary Introduction

To explain: The reason for the NPV of a relatively long-term project being more sensitive to the changes in WACC than that of short-term project.

Introduction:

Net Present Value (NPV):

It is a method under capital budgeting which includes the calculation of net present value of the project in which company is investing. The calculation is done by calculating the difference between the value of cash inflow and the value of cash outflow after considering the discounted rate.

Weighted Average Cost of Capital (WACC):

It is the discounted rate that has been calculated by the company on the basis of which the present values of cash outflows and inflows are calculated under capital budgeting.

Explanation
  • Since, NPV uses the discounted method to calculate cash flows, the higher amount will have higher effect due to a change in the cost of capital...

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