Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return?
A) Decreasing the required discount rate
B) Increasing the initial investment in fixed assets
C) Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows
D) Eliminating the salvage value
E) Decreasing the amount of the final cash inflow

Question

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return? 
A) Decreasing the required discount rate 
B) Increasing the initial investment in fixed assets 
C) Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows 
D) Eliminating the salvage value 
E) Decreasing the amount of the final cash inflow

Quizplus · Accepted Answer

By condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows, the project's overall cash flow will increase in the shorter time period, leading to a higher internal rate of return. This is because the time value of money will have a greater impact due to the shorter period. The other options either decrease the cash inflows or increase the cost of the project, which will decrease the internal rate of return.

Tedder Mining Has Analyzed a Proposed Expansion Project and Determined