Projects S and L are both normal projects with an initial cost of $10,000, followed by a series of positive cash inflows.Project S's undiscounted net cash flows total $20,000, while L's total undiscounted flows are $30,000.At a cost of capital of 10%, the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the cost of capital?
A) Project L.
B) Both projects are equally sensitive to changes in the cost of capital since their NPVs are equal at all costs of capital.
C) Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal.
D) The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs.
E) Project S.

Question

Quizplus · Accepted Answer

Project L's NPV is more sensitive to changes in the cost of capital because it has higher undiscounted cash flows spread over time, making its value more affected by the discount rate compared to Project S.

Projects S and L Are Both Normal Projects with an Initial