Question

Project W requires a net investment of​ $1,000,000 and has a payback period of 5.6 years. You analyze Project W and decide that Year 1 free cash flow is​ $100,000 too​ low, and Year 3 free cash flow is​ $100,000 too high. After making the necessary​ adjustments,

(A) the NPV of Project W will decrease,
(B) the payback period for project W will be longer than 5.6 years.
(C) the IRR of Project W will increase
(D) the payback period for Project W will be shorter than 5.6 years

Answer 1

Option C is correct.

Step-by-step explanation:

The paycheck of a period is the time within which the initial investment is recovered.

It does not consider the time value of money, which means all cash flows have equal weightage.

The paycheck period is 5.6 years and it will not be affect by the change in the cash flow in the year 1 and 3.

The IRR (Internal return rate) and NPV ( Net present Value) of the project will get affected as these methods give more weightage to current flows than later.

Thus, increasing of year-1 cash flow decreasing of year-3 cash flow will increase the IRR and NPV of project.

Therefore, the correct answer is option C ( The IRR of the C will increase.)