Assume a project has normal cash flows (that is, the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?
A) All else equal, a project's IRR increases as the cost of capital declines.
B) All else equal, a project's NPV increases as the cost of capital declines.
C) All else equal, a project's MIRR is unaffected by changes in the cost of capital.
D) Answers a and b are correct.
E) Answers b and c are correct.

Question

Quizplus · Accepted Answer

As the cost of capital declines, the present value of future cash flows increases, resulting in a higher net present value (NPV) for the project. The internal rate of return (IRR) is dependent on the cash flows themselves and not directly affected by the cost of capital. Modified internal rate of return (MIRR) takes into account the reinvestment rate and therefore may be affected by changes in the cost of capital, however, it is not always the case. Option D is incorrect as the IRR is not affected by changes in cost of capital. Therefore, the correct answer is B.

Assume a Project Has Normal Cash Flows (That Is, the Initial