Projects having higher cash inflows in the early years tend to be less sensitive to changes in the cost of capital and are therefore often acceptable at higher discount rates compared to projects with higher cash inflows that occur in the later years.

Question

Quizplus · Accepted Answer

Projects with higher cash inflows in the early years have a larger proportion of their cash flows occurring during the initial period. This means that the NPV of the project is less sensitive to changes in the discount rate since the majority of the cash flows are discounted at a lower rate. Therefore, these projects may be acceptable at higher discount rates compared to projects with higher cash inflows that occur later, which are more dependent on the terminal value and are more sensitive to changes in the discount rate.

Projects Having Higher Cash Inflows in the Early Years Tend