Therefore, minimization of NP is closely relevant to the minimization f shareholders’ equity. Assumption No transaction fee, not trading tax, all price takers I-b. To be this assumption correct, we need to consider the factors as follows; Fundamentally, FCC Is fixed Initial investment. Also, since r Is a market Interest rate, It will be the same. Therefore, to get a precise NP and maximize the result, how the company can produce CUFF Is the most significant Issue to this argument.
However, FCC and R also can be changeable, and the following topics are possible arguments. V: Interest rate: When we calculate present value of project, the discounted rate or market rate has a huge influence on the calculation. Even if we calculate detailed CUFF projection very precisely, the result could be changed. Interest rate could change if time elapses. So this is also not always the same. The CUFF which the project produces earlier would be chosen among other projects because the impact of interest rate is huge. FCC”: Initial Investment Initial Investment will directly affect the NP because It occurs the first year. However, f the project can postpone the payment of the Minimal Investment to later such as paying when the revenue occurs. So that the company can lessen the Impact of FCC. “CUFF’: cash Flow: To get precise NP, precise projection of CUFF which the project can produce is indispensable. Considering the discounted rate, producing bigger CUFF in earlier period is beneficial for the company because if the company produce CUFF later years, the impact of discount is huge.
For example, if the company can produce $1 MM in 10 years, and the discount rate is 6%, the present value will be $1 MM/(I “NAP: s a whole When we compare many projects, NP itself also has the bias to choose longer period of project because longer-period project will produce CUFF longer, and it might be chosen. Since the NP Is taken account Into corporate value, If the project provides negative CUFF and If the company decides to stop the project, the corporate value will Increase for the amount which was a negative. For example, If the NP of the project was negative $MUM, and the company decided to stop the project in earlier time,
