Project A has a pattern of large cash inflows in the early years of its life, whereas Project B generates a majority of its cash inflows in the later years of its life. Currently, both projects have the same net present value (NPV). If the firm's required rate of return increases, other things held constant, Project B will be more preferable than Project A after the rate change.
Answer the following statement true (T) or false (F)
False
If a project has most of its cash flows coming in the early years, its NPV will not be lowered as much when the required rate of return increases as the NPV of a project whose cash flows come later in its life. Accordingly, a project that generates the largest cash flows in the early years of its life is affected less by high discount rates. See 9-3: Comparison of the NPV and IRR Methods
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