Positive rate of inflation effect of IRR and payback period

CCordel8y ago

A project consists of a series of outflows in the first years followed by a series of positive cash inflows. The total cash inflows exceed the total cash outflows. The project was originally evaluated assuming zero rate inflation If the project were re-evaluated on the assumption that the cash flows were subject to a positive rate of inflation, what would be the effect of the payback period and the internal rate of return Payback Period Internal rate of return A. Increase Increase B. Decrease Decrease C. Decrease Increase D. Increase Decrease I believe someone told me the answer for this is C. I know that the payback period would decrease as they would be collecting a higher cash flow. But why is that the internal rate of return is increasing shouldn't it decrease as they would be collecting a higher cash flow???

John MoffatTutor8y ago#1

I am worried that you are asking questions for which you obviously don't have printed answers to (otherwise you would not be quoting what someone has told you). How do you know that those questions for which you have got the same answer as what 'someone' has told you are actually correct?? If you want to be sure of passing the exam you really must buy a Revision Kit from one of the ACCA approved publishers (you can get a 20% discount on those from BPP from following the link on each page here). They contain exam standard questions and (more importantly) have answers and explanations. You will know from my free lectures that the IRR is, by definition, that rate of interest at which the NPV is zero. If the cash inflows are higher, then the IRR must be higher to still get an NPV of zero. The correct answer is indeed C.

CCordel8y ago#2

Thank you once again, Mr Moffat. Silly mistake on my part. I currently have 2 BPP kits. The most updated one and one from 2015/2016. The issue is that we get some multiple choice from Pearson online and work as a group to figure it out. If all else fails we ask a tutor and if the tutor is not available I come to open tuition who greatly assists me.

John MoffatTutor8y ago#3

No problem :-)

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