If the net present value of a proposed investment is positive,
A)the cost of the investment is more than the present value of the future cash flows.
B)the investment does not earn the required rate of return.
C)the present value of the future cash flows would be unaffected by the proposed investment.
D)the firm should make the investment because the present value of the future cash flows is more than the cost of the investment.

Question

Quizplus · Accepted Answer

A positive net present value indicates that the present value of the future cash flows is greater than the cost of the investment. Therefore, the firm should make the investment. Option A is incorrect because it suggests that the cost of the investment is more than the present value of the future cash flows, which is the opposite of a positive net present value. Option B is incorrect because a positive net present value means that the investment earns more than the required rate of return. Option C is incorrect because the proposed investment would have an impact on the present value of the future cash flows.

If the Net Present Value of a Proposed Investment Is