Book 6/Exam 2-PM/Q.107

Suppose Malfoy has forgotten to reflect a decrease in inventory that will result at the beginning of the project. The MOST likely effect on estimated project NPV of this error: a. Is to overestimate NPV b. Is to underestimate NPV c. Is to not affect NPV estimate Am I right when reasoning: decrease in inventory —> decrease in initial investment ----> NPV increases. (go for A)?

No. Decrease in inventory --> Increase in cash --> Less initial cash outlay --> Higher NPV --> B.

But higher NPV means it is overestimated?

Decrease in inventory ignored -> #NWC is more than actual -> higher initial outlay -> reduced NPV Hence B, NPV will be underestimated.