Explain why the NPV of a relatively long-term project defined as one for which a high percentage of

QUESTION

Explain why the NPV of a relatively long-term project, defined as one for which a high percentage of its cash flows are expected in the distant future, is more sensitive to changes in the cost of capital than is the NPV of a short-term project.
In NPV method, the net present value is calculated by discounting the expected cash flows to arise in future. This method basically compounds the rate of interest over time. Therefore, the

increased discount rate for the year 5 will have greater effect on that years cash flow than on the first years cash flow.

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