Consider a project with an initial investment and positive future cash ﬂows. As the discount rate is increased the ___________________.
A) IRR remains constant while the NPV increases
B) IRR decreases while the NPV remains constant
C) IRR remains constant while the NPV decreases
D) IRR increases while the NPV remains constant
E) IRR decreases while the NPV decreases

Question

Quizplus · Accepted Answer

As the discount rate (required rate of return) is increased, the present value of the future cash flows decreases which leads to a decrease in the net present value (NPV) of the project. However, the internal rate of return (IRR) is the discount rate at which the NPV is equal to zero. So, it will remain constant because the project's cash flows are not affected by the discount rate. Therefore, the correct answer is option C, "IRR remains constant while the NPV decreases".

Consider a Project with an Initial Investment and Positive Future