Final answer:
The NPV using cash flows differs from profits because it considers actual cash movements, while accounting profits may include non-cash items. Delaying an initial payment lowers the NPV calculated using cash flows due to later receipt of cash, whereas profit-based NPV does not consider timing. Interest rate fluctuations also impact the present value of future cash flows, with higher rates leading to lower present values.
Step-by-step explanation:
When assessing whether NPV using profits will be higher or lower, it's important to understand that cash flows and profits are not the same. Profits are an accounting concept that reflects revenue minus expenses, while cash flows consider the actual movement of cash into and out of a business.
Discrepancies between the two can arise due to non-cash expenses like depreciation and amortization, changes in working capital, and the timing of revenue and expense recognition. If the initial payment is delayed, the NPV calculated using cash flows will decrease, because the present value of future cash flows would be less due to the delay.
Since NPV using profits doesn't account for the exact timing of cash movements, a delay in initial payment would not directly affect it. However, for practical decision-making, companies prefer to use cash flows since they indicate the actual liquidity impact of a project or an investment.
Regarding bond investments, the present value of future cash flows will also vary with changes in interest rates. As interest rates increase, the present value of these payments decreases since you are discounting them at a higher rate.