Question
JT Engineering is considering a project with a $400,000 investment that will generate $640,000 net cash flows over five years. JT determined net present value
JT Engineering is considering a project with a $400,000 investment that will generate $640,000 net cash flows over five years. JT determined net present value (NPV) is $61,412 at a 12% discount rate. Unfortunately, this project is riskier than most of JTs other projects, which the company failed to account for. What error did JT make as a result and what impact did it have on NPV?
JT used a discount rate that was too low which resulted in an NPV that was too high.
JT used a discount rate that was too high which resulted in an NPV that was too high.
JT used a discount rate that was too high which resulted in an NPV that was too low.
JT used a discount rate that was too low which resulted in an NPV that was too low.
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