Project S has a pattern of high cash flows in its early life,while Project L has a longer life,with large cash flows late in its life.At the current required rate of return,normal Projects S and L have identical NPVs.Now suppose interest rates and money costs generally decline.Other things held constant,this change will cause L to become preferred to S.

Question

Quizplus · Accepted Answer

As interest rates and money costs decline, the present value of future cash flows increases. Since Project L has large cash flows late in its life, its overall present value would increase more than Project S, which has high cash flows in the early stage of its life. Therefore, L will become preferred to S with the decline in interest rates and money costs.

Project S Has a Pattern of High Cash Flows in Its