5 Economic Changes and Project Value Free Online FlashCards

What does a positive NPV indicate?

A positive NPV means discounted benefits exceed discounted costs under the assumptions used.

How does nominal analysis account for inflation?

Forecast cash flows including expected inflation, then discount them using a nominal rate.

How can a higher discount rate affect a long-payback project?

A higher discount rate generally lowers the present value of later cash flows, making projects with long payback periods especially sensitive.

What can a weaker domestic currency do to a project?

It can raise domestic-currency costs for imported equipment and foreign-currency debt service, while increasing the domestic-currency value of export revenues.

What determines a project’s exposure to input-price changes?

Exposure depends on how much of the input is used, when it is needed, and whether substitutes are available.

How can an economic slowdown affect a project?

A slowdown may reduce customer demand, sales, or usage; labor-market changes can also affect wage costs and skilled-worker availability.

What does sensitivity analysis test?

Sensitivity analysis varies one assumption at a time and shows its effect on NPV.

How does real analysis account for inflation?

Remove general inflation from cash flows, then discount them using a real rate.

What must be consistent in inflation-adjusted appraisal?

Match nominal cash flows with a nominal rate, or real cash flows with a real rate. Mixing the two bases is inconsistent.

What is a relative price change?

A relative price change occurs when an item’s price changes differently from the general price level, altering its real cost or value.

How do financing rates differ from an economic discount rate?

Financing rates describe the cost and terms of raising money; the economic discount rate is selected for the appraisal’s purpose and perspective. A loan rate should not automatically replace it.

Why might a society-wide appraisal use a shadow exchange rate?

Where relevant, use the prescribed shadow-exchange-rate method because market exchange rates may not reflect the economic opportunity cost of foreign currency.