Which of the following statements regarding NPV analysis is true?
A) Uncertainties increase as the dollar value of an investment increases
B) The discount rate can be calculated with certainty if it is based on the weighted average cost of capital
C) Managers should generally accept projects with an NPV greater than zero
D) The timing of incremental revenues and costs is irrelevant in NPV analysis

Question

Quizplus · Accepted Answer

Managers should generally accept projects with an NPV greater than zero because it indicates that the project will add value to the company. A positive NPV means that the project's expected cash inflows exceed its expected cash outflows, discounted at the required rate of return. Choices A, B, and D are incorrect statements. Uncertainties do not necessarily increase as the dollar value of an investment increases as it depends on the project's specific characteristics. The discount rate can be calculated with certainty only if all the inputs are known with certainty, which is rare. The timing of incremental revenues and costs is essential in NPV analysis because it considers the time value of money.

Which of the Following Statements Regarding NPV Analysis Is True