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.

Answer 1

Answer:

C) Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows.

Explanation:

When you determine the net present value of project, the longer the project, the lower the present value of its cash flows. A way to try to increase the NPV of a project is to try to shorten its life span without reducing the value of its cash flows.

This sounds much simpler than it is. Since your project should produce cash flows in a shorter time, you will have to probably shorten the time periods of some activities, e.g. building new facilities, research and development, etc.