PRC-2 · Chapter 6 · Question 23 of 45
Holding all other cash flow variables absolutely constant, what will occur to the Net Present Value (NPV) of a typical project if the applied discount rate is increased?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) The NPV will strictly decrease.
Explanation
Because the discount rate is in the denominator of the PV formula, a higher discount rate mathematically shrinks the present value of all future cash inflows, thereby decreasing the overall NPV.
More Discounted Cash Flows MCQs
- Q25When utilizing the linear interpolation formula to manually estimate the Internal Rate of Return (IRR), a financial analyst must calculate…
- Q26If an appraisal features an initial investment of Rs. 1,000,000 and promises a constant annual cash inflow of Rs. 150,000 for a duration…
- Q27A firm is choosing between Project X and Project Y, which are mutually exclusive. Project X has an NPV of Rs. 50,000 and an IRR of 14%…
- Q28What critical financial concept justifies the entire process of discounting future cash flows in capital budgeting?
- Q29A potential weakness of the Internal Rate of Return (IRR) appraisal technique is its mathematical susceptibility to 'unconventional cash…