Final answer:
The discounted payback period of a project will increase if the project's discount rate increases, as the present value of future cash inflows will be lower, taking more time to recover the initial investment. Factors like a decreased initial cost, earlier cash inflows, or project risk do not increase the discounted payback period directly, with the latter potentially having no impact if the discount rate remains unchanged. Option A is correct answer.
Step-by-step explanation:
The question asks about the effect of various factors on the discounted payback period of a project. The discounted payback period is the time it takes for the present value of cash inflows to cover the initial investment, considering the time value of money. To analyze the impact of an increase in the discount rate, we refer to the concept of present value which is a means to assess future cash flows in today's terms, adjusting for risk and the time value of money.
When the discount rate of a project increases, the present value of future cash inflows decreases as each cash inflow is discounted at a higher rate. This means it would take longer for the accumulated present value of cash inflows to equal the initial investment, thus increasing the discounted payback period.
The principle can be observed when a bond with fixed dollar payments is discounted at a higher interest rate—its value falls due to lower present values of future payments. In contrast, a decreased initial cost would shorten the period, earlier cash inflows would mean the investment can be recouped quicker, and a decrease in project risk wouldn't directly affect the payback period if the discount rate stays the same.