Question

Suppose a capital budgeting project generates its largest cash flows in the early years of its life (i.e., up front) rather than near the end of its life. In this situation. Which of the following statements about the project must be correct?

Answer 1

Answer:

The net present value of the project is not as sensitive to changes in the firm's required rate of return as the net present value of a project that generates large cash flows later in its life.

Explanation:

In capital budgeting, when a project generates its largest cashflows in the first few years of its life will have a net present value(NPV) that is not as sensitive to changes in the firm's required rate of return as the net present value of a project that generates large cash flows later in its life. Additionally, its Internal Rate of Return(IRR) and NPV value will be higher than that with larger later cash flows.