66 An increase in the expected salvage value at the end of a

66. An increase in the expected salvage value at the end of a capital budgeting project will A. Increase the cash outflows of the project B. Increase the present value of cash inflows of the project C. Decrease the cash inflows of the project D. Decrease the net present value of a project

Solution

Net present value of capital budgeting project is calculated by deducting present value of cash outflows from the present value of total cash inflows over the project life. Present value of total cash inflows is sum of present value of annual cash inflows and present value of expected salvage value at the end of project life.

Thus if there is an increase in the expected salvage value at the end of a capital budgeting project, the present value of cash inflows of the project will increase.

Hence the correct option is B) Increase the present value of cash inflows of the project.