The net present value for a project with a relatively long life is more sensitive to changes in the required rate of return than the net present value for a project with a relatively short life because:
A)the internal rate of return is greater the longer the term of a project.
B)interest is compounded over time.
C)a change in the discount rate has a much greater impact on more distant cash flows.
D)distant cash flows are more uncertain.

Question

Quizplus · Accepted Answer

A change in the required rate of return has a greater impact on cash flows that are further away in the future because the discount factor is applied to all future cash flows. The longer the project's life, the more cash flows are impacted by changes in the required rate of return. In contrast, a project with a short life has fewer cash flows and is therefore less sensitive to changes in the required rate of return.

The Net Present Value for a Project with a Relatively