Project S has a pattern of high cash flows in its early life, while Project L has a longer life, with large cash flows late in its life.Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical NPVs.Now suppose interest rates and money costs decline.Other things held constant, this change will cause L to become preferred to S.

Question

Quizplus · Accepted Answer

As the interest rates and money costs decline, the present value of the larger cash flows in the later years of Project L will increase more than the present value of the earlier cash flows in Project S. Therefore, Project L will become more profitable and preferred over Project S.

Project S Has a Pattern of High Cash Flows in Its