Assume you computed the NPV of a project using nominal values. Your partner computed the NPV...
Assume you computed the NPV of a project using nominal values. Your partner computed the NPV of the identical project using real values, given a positive rate of inflation. When you compare your results, you should discover that
Multiple Choice
a) your NPV value is greater than your partner’s NPV value.
b) your NPV values are identical.
c) your partner’s initial cash flow at Time 0 is less than the value you used for Time 0.
d) the discount rate used by your partner is higher than the rate you used.
e) both computations used the identical discount rate.
Homework Answers
Correct choice - b. your NPV values are identical
There are 2 common approaches to compute NPV.
1. Using nominal cash flows and discounting at the nominal discount rate
2. Using real cash flows and discounting at the real discount rate
Using any of the 2 approaches, will yield the same NPV.
Thus, our and our partner's NPV will be identical.
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