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Normal (a.k.a. conventional cash flow, i.e. costs followed by cash inflows) Projects Q and R have...

Normal (a.k.a. conventional cash flow, i.e. costs followed by cash inflows) Projects Q and R have the same NPV when the discount rate is zero. However, Project Q has larger early cash flows that R. Therefore, we know that at all discount rates greater than zero Project Q will have a _________ NPV than R. (Hint: With larger early CFs, Q is effectively shorter term than R., Which is more sensitive to changes in interest rated in an NPV profile?)

greater.

smaller.

equal, since they have the same NPV when the discount rate is zero.

you need to know the interest rate to answer this question.

you need to know the actual cash flows to answer this question.

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Answer #1

NPV = present value of cash inflows - present value of cash outflows

Projects with earlier cash flows will have higher NPV

Hence, Q will have greater NPV than R

R is more sensitive to interest rate changes since cash flows occur later

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