Week 6 Discussion 1 Capital Budgeting And Ris K An

Week 6 Discussion 1Capital Budgeting and Risk AnalysisFrom the e-Activity, analyze the reasons why the short-term project that you have chosen might be ranked higher under the NPV criterion if the cost of capital is high, while the long-term project might be deemed better if the cost of capital is low. Determine whether or not changes in the cost of capital could ever cause a change in the internal rate of return (IRR) ranking of two (2).NPV criterion finds the present value of the expected cash flows from an investment by discounting them at the cost of capital and subtracting the initial cost of the outlay of the project. When the cost of capital is high the discount factor is therefore high. NPV is sensitive to a high discount rate especially where a large proportion of cash flows occur near the end of the project. Secondly long-term projects involve a larger proportion of cash flows discounted multiple times that short term projects. Thus NPV favors short-term projects over long-term projects. In addition NPV assumes that cash flows are reinvested at the discount rate. This means higher cash flows earlier in the life of the project allow for more