T
Tushar Gora
Member
A company uses an investment return assumption of 5.5% for profit testing. The risk discount
rate is same as well. During a profit testing exercise, the company decided to increase the
prudence margin in reserving from 10% to 12.5%. The NPV of future profits at the inception
of the contracts:
(a) Will increase by 2.5%
(b) Will decrease by 2.5%
(c) Will remain unchanged
(d) Will increase by 0.15%
The correct answer is (c). I want to know the logic behind this.
Wouldn't the profit vector change by changing the prudence margin, which should change the NPV.
rate is same as well. During a profit testing exercise, the company decided to increase the
prudence margin in reserving from 10% to 12.5%. The NPV of future profits at the inception
of the contracts:
(a) Will increase by 2.5%
(b) Will decrease by 2.5%
(c) Will remain unchanged
(d) Will increase by 0.15%
The correct answer is (c). I want to know the logic behind this.
Wouldn't the profit vector change by changing the prudence margin, which should change the NPV.