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Assume a project currently has a negative net present value. Which one of these expectations would...

Assume a project currently has a negative net present value. Which one of these expectations would indicate that the timing option for that project may have a positive value?

  • The project's cash flow projections are expected to remain constant over time.

  • The life of the project's product is expected to decrease each year.

  • The demand for the project's product is expected to decrease within 6 months.

  • Competition in the project's product market is on the increase.

  • The contribution margin for the project is expected to improve next year.

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Answer #1

The contribution margin for the project is expected to improve next year.

This is the only case in which the NPV will turn positive. This is because the cash inflows will increase with higher contribution. If cash flows are constant it will not change the result. Decrease in life of project or demand will only reduce the profitability. Higher competition will reduce the profits.

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