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? I’ll share the juice.
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