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Cost of Capital

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My good old pal Joe the bartender called me into his place the other day with what he thought was a great riddle for me. He told me that if I get it right, he will send a case of fresh orange juice to me. He said two mutually exclusive projects are being considered. First, a short-term project might have a higher ranking under the NP criterion if the cost of capital is high. However, and here is where he lost me, a long-term project might be better if the cost of capital is low. Why is that?

As a bonus, he asked me if changes in the cost of capital would ever create a change in the IRR ranking of these two projects. What do you say?

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A short term project may have a higher ranking under the NPV method if the cost of capital is high. This is because a higher cost of capital will give a lower present value for cash flows that occur in the long term. So, if the cost of capital is high, then the ...

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