Question

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return?

A. Decreasing the required discount rate.B. Increasing the initial investment in fixed assets.C. Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows.D. Eliminating the salvage value.E. Decreasing the amount of the final cash inflow.

Answer 1

Answer:

A. Decreasing the required discount rate

Explanation:

The Internal Rate of Return of a Project is the Return that the Managers need in order to determine whether a project can be acceptable or not. For the project to be acceptable, its return (IRR) must cover the cost of capital.

The IRR is a function of Discount rate giving the Positive Net Present Value, % Discount Rate giving the Negative Present Value along with their Respective values - Positive and Negative.

Thus the decrease in required discount rate may increase the project`s internal rate of return since the decrease affect the Net Present Value functions.