Suppose that an existing machine generates a monthly cash flow of $150,000. An investment of $6,000,000 will increase the cash flow to $200,000 per month. The relevant monthly discount rate is1%. Should you invest? Lets use the incremental method: Period 0. Periods 1 Project 1. 0. 150,000 Project 2. -6,000,000 200,000 Diff 2-1. -6,000,000. 50,000

Incremental NPV = -6000000+ 50000/0.01= -$1,000,000

how come incremental NPV uses 1% rather than (1+r)