Projects L and S each have an initial cost of $10,000, followed by a series of positive cash inflows. Project L has total, undiscounted cash inflows of $16,000, while S has total undiscounted inflows of $15,000. Further, at a discount rate of 10 percent, the two projects have identical NPVs. Which project's NPV will be more sensitive to changes in the discount rate? (Hint: Projects with steeper NPV profiles are more sensitive to discount rate changes.)
A) Project S.
B) Project L.
C) Both projects are equally sensitive to changes in the discount rate since their NPVs are equal at all costs of capital.
D) Neither project is sensitive to changes in the discount rate, since both have NPV profiles which are horizontal.
E) The solution cannot be determined unless the timing of the cash flows is known.

Question

Quizplus · Accepted Answer

Since Projects L and S have the same NPV at a discount rate of 10%, we know that Project L must have a steeper NPV profile than Project S. This means that Project L's NPV will be more sensitive to changes in the discount rate compared to Project S, making Choice B the correct answer.

Projects L and S Each Have an Initial Cost of $10,000