When evaluating projects using NPV approach, ________.
A) projects having lower early-year cash flows tend to be preferred at higher discount rates
B) projects having higher early-year cash flows tend to be preferred at higher discount rates
C) projects having higher early-year cash flows tend to be preferred at lower discount rates
D) the discount rate and magnitude of cash flows do not affect the ranking by NPV approach

Question

Quizplus · Accepted Answer

The NPV approach considers the time value of money by discounting future cash flows to present value using a discount rate. Projects with higher early-year cash flows are preferred at higher discount rates because the higher the discount rate, the more weight is given to the earlier cash flows. This is because the time value of money effect is more significant at higher discount rates. Therefore, projects with higher early-year cash flows will have a higher NPV and will be preferred.

When Evaluating Projects Using NPV Approach, ________