Assume a project has normal cash flows (i. e., the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

a. All else equal, a project's IRR increases as the cost of capital declines.

b. All else equal, a project's NPV increases as the cost of capital declines.

c. All else equal, a project's MIRR is unaffected by changes in the cost of capital.

d. All else equal, the Payback will be lower, the higher the cost of capital.

Question

Logan Pittman

Business

6 October, 23:15

Assume a project has normal cash flows (i. e., the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

a. All else equal, a project's IRR increases as the cost of capital declines.

b. All else equal, a project's NPV increases as the cost of capital declines.

c. All else equal, a project's MIRR is unaffected by changes in the cost of capital.

d. All else equal, the Payback will be lower, the higher the cost of capital.

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Answers (1)

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Flowers · Answer 1

b. All else equal, a project's NPV increases as the cost of capital declines.

Explanation:

Net present value method: In this method, cash inflows from the discounted present value are subtracted from the initial investment. If the sum comes in positive than the project would be accepted otherwise not be beneficial to the company and therefore, the project should be rejected

In the given case, the initial cash flow is negative and the other cash annual flows are positive so if the cost of capital declines, the projected net present value increases and if the cost of capital is increases, the projected net present decreases being the other things are equal