Question

Consider a project with an initial outflow at time 0 and positive cash flows in all subsequent years. As the discount rate increases, the _____________.

		A.  IRR remains constant while the NPV increases.
		B.  IRR decreases while the NPV remains constant.
		C.  IRR increases while the NPV remains constant.
		D.  IRR remains constant while the NPV decreases.
		E.  IRR decreases while the NPV decreases.

Answer 1

Asnwer is D. IRR remains constant while the NPV decreases.

This is because, in NOV future value of cashflows are discounted to get the present value, hence, if the dicpunt rate will increase the the present value of future cash inflows will decrease without affecting the cash outflow at time 0. This will result in reduced NPV. Moreover IRR will not be affected because it is the rate at which the NPV is ) i.e. The present value of cash inflows is equal to the present value of cash outflows.