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A project consist of series of cashflows in first few years followed by series of positive cash inflows. The total cash inflows exceed total cash outflows. The project was originally evaluated assuming a 0 rate of inflation.
If the project were re evaluated on the assumption that the cashflows were subject to positive rate of inflation, what would be effect on IRR, whether it will increase or decrease.
Sir the answer is that IRR will increase , but please can you explain me that why it will increase?With positive inflation, the cash inflows will be higher.
With higher cash inflows then the project becomes more worthwhile and therefore to arrive at an NPV of zero will need a higher rate of interest.
Project becomes more worthwhile means that its NPV will increase? and therefore in order to reach at NPV of 0, the interest rate has to be increased as D.F is inversely proportional to NPV. Correct?
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