Normal Cash Flows for a Project: CFA® Level 1 Exam - Test Prep

The Importance of Normal Cash Flows in Project Analysis

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Question

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?

Answers

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

B. None of the answers are correct.

C. All of the answers are correct.

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

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

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Explanations

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A. B. C. D. E.

Since the present value of each cash flow is discounted at the project's cost of capital, the NPV will increase as the cost of capital declines, and the NPV will decline as the cost of capital increases. This relationship is plotted on the net present value profile.

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