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 cost of capital, 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

Since interest rates and money costs generally decline, the present value of future cash flows increases. This benefits Project L, which has larger cash flows later in its life. As a result, Project L becomes preferred to Project S.

Project S Has a Pattern of High Cash Flows in Its