Project A has a pattern of high cash inflows in the early years, while Project B has majority of its cash inflows in the later years. At the current required rate of return, Projects A and B have identical NPVs. Assuming that interest rates are increasing, other things held constant, this change will cause B to become more preferable than A.

Question

Quizplus · Accepted Answer

If interest rates are increasing, the present value of future cash flows will decrease, and this will have a greater impact on the cash flows of Project A, which is heavily reliant on early cash inflows. Therefore, Project B, which has more cash inflows in later years, would become more preferable.

Project a Has a Pattern of High Cash Inflows in the Early