Question

Consider a project with only positive cash flows after year 0. If the company felt that the risk of the project was less than original estimates, which of the following would occur?
Answer: Required Rate of Return Net Present Value Internal Rate of Return
A Higher Higher Lower
B Higher Lower No change
C No Change Higher No change
D Lower Lower Higher
E Lower Higher No Change

Answer 1

Answer:

E

Explanation:

The required rate of return is the rate used to discount cash flows when calculating NPV. the more risky a project is, the higher the required rate of return. So, if it is perceived that the project is less risky, the required rate of return would decrease.

Net present value is the present value of after tax cash flows from an investment less the amount invested.

Because the required rate of return is used to discount cash flows when calculating NPV, a lower rate would increase NPV  

Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested. The required rate is not needed when calculating IRR. so, there would be no change in IRR if discount rate is lowered.