Factors Affecting Net Present Value (NPV) of an Investment Project

D the discount rate increases.

The net present value (NPV) of an investment project is the present value of its future cash flows minus its initial cost. The discount rate is used to calculate the present value of future cash flows. A higher discount rate means that future cash flows are worth less today. Therefore, a higher discount rate will result in a lower NPV.

Explanation of Why Other Options are Incorrect:

• A: The initial cost of a project increases. Increasing the initial cost would decrease the NPV, not increase it.
• B: The rate of return decreases. A decrease in the rate of return would also decrease the NPV.
• C: All cash inflows occur during the last year of a project's life instead of periodically throughout the life of the project. This would actually decrease the NPV because the cash flows are received later, and therefore discounted more heavily.
• E: Each cash inflow is delayed by one year. Delaying cash inflows would also decrease the NPV because they would be discounted for a longer period.