Assume that an investment project’s assumed cash flows are not changed but the assumed weighted-average cost of capital is reduced. What impact would this have on the net present value (NPV) and the internal rate of return (IRR) of this project?

Answer (D) is correct. If the cost of capital is reduced, the PV factors are increased. This would result in a higher discounted cash inflow each year, resulting in a higher NPV. However, because the project’s assumed cash flows are not changed the IRR will not change. The IRR is the rate that makes the present value of the expected cash inflows equal the present value of the expected cash outflows.