Project Cash Flows: Normal Cash Flow Pattern

CFA Level 1 Exam: Understanding Project Cash Flows

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Question

Assume a project has normal cash flows (that is, 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. All else equal, a project's NPV decreases as the cost of capital declines.

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

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

E. None of the answers are correct. C

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Explanations

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A. B. C. D. E.

Explanation

Since the cost of capital is in the denominator of the NPV formula, the lower the cost of capital the higher the NPV. The more positive the NPV, the more cash the project is generating to service its debt and to provide the required return to shareholders.

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