9. Think about changes in a project once it has been accepted and moving forward. Here are 4 potential scenarios. For each, assume everything else stays the same and describe what you expect to happen to a project's expected NPV, and WHY that is your expectation. (2 pts for each of the following). Recall the 3 important factors for value: riskiness of cash flows (think required rate of return), timing of cash flows, and amount of cash flows.
As MBA students, just being able to calculate NPV isn't sufficient. You should be able to consider the effects of various market or project changes on the project's viability.
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MBA702 Summer 2025 AP2 PRACTICAL APPLICATION 2
LOOK AT EACH SITUATION INDIVIDUALLY AND ASSUME THAT THERE ARE NO OTHER CHANGES FOR THE FIRM.
a) The labor market is stronger than previously expected, resulting in higher than expected wages for construction workers at your company's new resort. The result is that more workers can be hired, decreasing the time to the grand opening (cash flows beginning sooner than expected). At the same time, the cost of construction will be higher. These two changes will both impact on the net cash flows. Discuss how each is expected to impact NPV. Discuss them separately, as we have no way to determine the combined effect.
b) Management is reconsidering its assumptions about the state of the U.S. economy in general and now believes there is a greater chance of an economic downturn, resulting in reduced demand for products which will be manufactured at a new facility under construction.
c) Recent tax law changes mean that there are tax incentives expected for your company's new beachside resort. [A tax incentive is a government measure that is intended to encourage individuals and businesses to spend money or to save money by reducing the amount of tax that they have to pay.]
d) Recent tariff increases enacted on one of a new project's biggest foreign markets has led to boycotts of American goods, impacting projected sales. Upper management is worried about the long-term effect of this change in market demand and has increased the market risk premium for this project.
