Answer:
d. The NPV of project A will be more sensitive to changes in the cost of capital compared to the NPV of project B
Explanation:
The net present value is the present value of after tax cash flows from an investment less the amount invested.
The sensitivity to cost of capital can he determined by calculating the npv using different cost of capitals.
Net present value can be calculated using a financial calculator.
For the first project:
Cash flow in year zero = -100,000
Cash flow each year from year one to five = 200,000
Npv when I is 8% = 698,542.01
Npv when I is 10% = 657,157.35
NPV when I is 12% = 620,955.2
For the second project:
Cash flow in year zero = -100,000
Cash flow in year one = 400,000
Cash flow in year two = 300,000
Cash flow in year three = 200,000
Cash flow in year four and five = 50,000
Npv when I is 8% = 757,119.12
Npv when I is 10% = 727,029.95
NPV when I is 12% = 698,804.32
The percentage change in the npvs of project A is greater than the percentage change in npv of project b when different cost of capitals are used. Thus, project A is more sensitive to cost of capital.
To find the NPV using a financial calacutor:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
I hope my answer helps you
