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    Leverage and NPV

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    My brother claims that investment projects which are mainly financed with debt, have to bear great financial expenses and therefore will generate lower net cash flows than those generated by projects using a little debt financing. At the end, highly leveraged projects are penalized and have lower Net Present Value.

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    In finance there is an investment decision and a financing decision. For a project, first you do the investment decision and calculate the NPV. If the NPV is positive and you decide to go for the project, then you take the financing decsion of how to raise money for the project. In the investment decision, there is no ...

    Solution Summary

    The solution explains the effect of using debt on the NPV of a project