Question

Explain why the Net Present Value (NPV) of a relatively long-term project, defined as one for which a high percentage of its cash flows are expected in the distant future, is more sensitive to changes in the cost of capital than the NPV of a short-term project. Would changes in the cost of capital ever change the Internal rate of Return (IRR) ranking of two such projects?

Name: explain why the net present value npv of a relatively long term project defined as one for which a high percentage of its cash flows are expected in the distant future is more sensitive to c 62641
Uploaded: 2022-07-29T05:22:16-08:00
Duration: 2 min 19 s
Channel: Jennifer Stoner
Description: explain why the net present value npv of a relatively long term project defined as one for which a high percentage of its cash flows are expected in the distant future is more sensitive to c 62641

          Explain why the Net Present Value (NPV) of a relatively long-term project, defined as one for which a high percentage of its cash flows are expected in the distant future, is more sensitive to changes in the cost of capital than the NPV of a short-term project. Would changes in the cost of capital ever change the Internal rate of Return (IRR) ranking of two such projects?

Added by Lauren B.

Principles of Economics

Gregory Mankiw 8th Edition

Instant Answer

Solved by Expert Jennifer Stoner

07/29/2022

Step 1

For a long-term project with a high percentage of cash flows expected in the distant future, changes in the cost of capital will have a greater impact on the NPV compared to a short-term project. This is because the discounting process compounds the interest over Show more…

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Explain why the Net Present Value (NPV) of a relatively long-term project, defined as one for which a high percentage of its cash flows are expected in the distant future, is more sensitive to changes in the cost of capital than the NPV of a short-term project. Would changes in the cost of capital ever change the Internal rate of Return (IRR) ranking of two such projects?