As the discount rate increases, what happens to the net present value (NPV) of a project with fixed cash inflows?

• A. It decreases
• B. It increases
• C. It remains the same
• D. It becomes negative automatically

Answer: (A)

Increasing the discount rate lowers the present value of future cash inflows because each inflow is divided by a larger factor (1+r)^t. Since NPV equals the sum of those discounted inflows minus the initial investment, raising the rate reduces the total present value and thus decreases NPV when the cash inflows are fixed. This relation is monotonic: higher discount rates always shrink NPV for fixed inflows. It doesn’t become negative automatically; that depends on whether the discounted inflows are enough to cover the investment.