Assume a project has normal cash flows.All else equal, which of the following statements is CORRECT?
A) A project's NPV increases as the cost of capital declines.
B) A project's MIRR is unaffected by changes in the cost of capital.
C) A project's regular payback increases as the cost of capital declines.
D) A project's discounted payback increases as the cost of capital declines.
E) A project's IRR increases as the cost of capital declines.

Question

Quizplus · Accepted Answer

As the cost of capital declines, the discount rate used in calculating NPV decreases. This leads to higher present values of cash inflows and a higher NPV. Therefore, a project's NPV increases as the cost of capital declines. Option B is incorrect because the MIRR is affected by changes in the cost of capital. Option C and D are incorrect because both regular and discounted payback decrease as the cost of capital declines. Option E is also incorrect because a project's IRR may increase or decrease as the cost of capital changes, depending on the size and timing of cash flows.

Assume a Project Has Normal Cash Flows