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

Question

Quizplus · Accepted Answer

By condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows, the project's internal rate of return will increase. This is because the cash flows will be earned sooner and can be reinvested, thus compounding the returns. Decreasing the required discount rate (A) or eliminating the salvage value (D) could also increase the internal rate of return, but it depends on the specific circumstances of the project. Increasing the initial investment in fixed assets (B) or decreasing the amount of the final cash inflow (E) would likely decrease the project's internal rate of return.

Tedder Mining Has Analyzed a Proposed Expansion Project and Determined