Time Value of Money Question (NPV)
Posted: May 7th, 2009, 11:38 am
Hi,I've got a relatively simple NPV question which I was hoping someone could assist me with. The question is as follows:QuoteAn expenditure of £1m on project X started in year 0 will yield certain revenue in year 1 of £2m. A mutually exclusive Project Y started in year 1 will cost £2m and yield certain revenue in year 3 of £4m. All money amounts are expressed in real terms adjusted for inflation.Which of the statements below is correct?:(a) Project Y will have identical NPV to project X if the discount rate for project X is half that for project Y(b) Project Y is preferred unless the discount rate is greater than 100%(c) Project Y is preferred unless the discount rate is less than 100%(d) Project X is preferred unless the discount rate is greater than 50%(e) Project X is preferred unless the discount rate is less than 50%----My attempt at the question:(a) can be proved incorrect by a simple contradictory case.To test the remaining statements (b, c, d, e), I did a few test cases:None of the statements seem to fit with the values I've worked out, at each of the discount rates.Can anyone see if I'm doing something wrong? Thanks.MdSalih