The following diagram shows the situation of either under-investing or overinvesting when a company deviates...
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The following diagram shows the situation of either under-investing or overinvesting when a company deviates from the optimal investment point (P). If investment is at point X, the resulting NPV becomes (Possible answer solutions, AE, RS, AR, AS) At point X, the company has (Possible answer solutions are Underinvested, Overinvested, Invested Optimally) If investment is at point Y, the resulting NPV becomes (Possible answer solutions, AE, RS, AR, AS) At point Y, the company has (Possible answer solutions are Underinvested, Overinvested, Invested Optimally) If the market interest rate increases, the maximum amount of investment will (possible answer solutions are Decrease, Increase, Remain the same) f the market interest rate decreases, the maximum amount of investment will (possible answer solutions are Decrease, Increase, Remain the same)
FIGURE 5.2 Under-investing and over-investing
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