A higher cost of capital used as the discount rate will generally:
AIncrease NPV
BMake NPV equal to IRR
CHave no effect
DDecrease NPV
Answer & Solution
Correct answer: D. Decrease NPV
1. Higher discount rate → lower PV of future inflows.
2. NPV = PV of inflows − Initial outlay.
3. Hence higher discount rate ⇒ lower NPV.
_Source: ICAI BoS CA Inter Paper 6A, Ch 7 "Investment Decisions", §7_