Question

From the e-Activity, analyze the reasons why the short-term project that you have chosen might be ranked higher under the NPV criterion if the cost of capital is high, while the long-term project might be deemed better if the cost of capital is low. Determine whether or not changes in the cost of capital could ever cause a change in the internal rate of return (IRR) ranking of two (2) projects.

Answer 1

Ansoe fsom the e-activity 米Analyze the tesons WhJ the shoer-tetMpuject that you have c hosen might be éanked highes undee the NPY cta tetion if the cast of capital isんgh obile the lont leem Psoject might be demand betcs F the cost of capital Loo . A h'gh that the ptoject has cost 아 capital means a high Jevel of tisk ass ocie uoi Is high, it ω、11 have been highet és k , 'f time span is longet, So when Péojechs have high cestof Capitel and apporimate equal NPvs, the Ptoject with shoedest Project tife should be tanke d highetfaさ compous)on. Given the above teas on, a long-teem Peoject is bette İf cost of capital is th it since the -Jsk Also shot teem Peojeet might be tanked highet andes the NPVv ctiHeeion f the cost of capital is high becouse the Psesen velue of the cash flototeceived wil be lowe飞 compased to the long tetm Peoject having lod cost o F capiteJ 丶 MPv is based on the psesent value of the cash Plows and a high cost of capta a

long' teem psejec is deemand to be bettet hawin Jouw cost of cupial as compased fo the shoe Peejech having high cost of capitel Đetet mine Capitd could eves cause a chang io the inłeenel * to betheも not changes m the cost of ges the cost of capial o not equse by the Positive cash flow and the tate P teluen caluwided is cotsespon diny to the NPu OS) 11Ve belna- eq uerl to zeto . Mote ovet IRR Shoudld be equel to costof Cq capital fot a Peoject to have zeseo NPv