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.Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical NPVs.Now suppose interest rates and money costs decline.Other things held constant, this change will cause L to become preferred to S.

Question

Quizplus · Accepted Answer

A decline in interest rates and money costs will decrease the present value of future cash flows, which will have a greater impact on the longer-lived Project L compared to the shorter-lived Project S. Therefore, Project L is more likely to become preferred over Project S with the decline in interest rates and money costs.

Project S Has a Pattern of High Cash Flows in Its