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A project consists of a series of cash outflows in the first few years followed by a series of
positive cash inflows. The total cash inflows exceed the total cash outflows. The project
was originally evaluated assuming a zero rate of 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 on the payback period and the
internal rate of return?
the answer is payback decrease and irr increase..can u explain how it is??
Inflation will mean that the cash inflows are higher.
If the cash inflows are higher, it will pay for itself sooner and so the payback period will decrease.
If the cash inflows are higher, then the NPV will be higher (whatever the cost of capital is) and therefore the IRR will be higher.