Question

Assume a project has normal cash flows (i.e., the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

All else equal, a project's IRR increases as the cost of capital declines.

All else equal, a project's NPV decreases as the cost of capital declines.

All else equal, a project's MIRR is unaffected by changes in the cost of capital.

Answers a and b are correct.

Answers b and c are correct.

None of the above

Answer 1

The correct option os None of the above

The internal rate of return os the average rate of return that a project gives over the lifetime of the project and it is independent of the cost of the capital means it is not affected by the cost of capital though it can be compared to analyse the returns.

The NPV increases as the cost of capital decreases because the present value of cash flows will be more as compared to earlier, which will increase the Net present value.

The MIRR is dependent on the cost of capital as it used to compound the returns that a project gives often known as reinvestment rate in MIRR equation.