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City and Regional Planning QUESTION #4976
Question 1
In Net Present Value (NPV) calculation, if discount rate increases from 5% to 10%, the NPV will:
  • Increase
  • Decrease✔️
  • Remain constant
  • Double
Correct Answer Explanation
NPV formula $NPV = \sum_{t=0}^{n} \frac{C_t}{(1+r)^t}$ shows inverse relationship with discount rate $r$. Higher discount rate reduces present value of future cash flows, decreasing NPV. This reflects higher opportunity cost of capital.