If a manager is evaluating a project that will affect the cash flows of other projects, she should first calculate the NPV of the project as an independent project and
A)reject it if it has a negative NPV to avoid reducing firm value.
B)accept it if it has a positive NPV in order to increase firm value.
C)accept it if it has a zero NPV in order to increase firm value.
D)Both A and C are correct statements.

Question

Quizplus · Accepted Answer

The manager should first calculate the NPV of the project as an independent project and accept it if it has a positive NPV in order to increase firm value. The potential impact on the cash flows of other projects should be considered separately and factored into the decision-making process. Rejecting a project solely because it may negatively affect cash flows of other projects could lead to missed opportunities for value creation. The NPV of the project should be calculated as an independent project to determine its potential contribution to the firm's overall value. If it has a positive NPV, it should be accepted, even if it affects the cash flows of other projects. This is because the overall goal for the firm should be to maximize its value, and accepting projects with positive NPVs will contribute to that goal. Rejecting a project solely based on its potential impact on other projects' cash flows may not necessarily be the best decision for the firm's overall value. Choosing option C is incorrect because accepting a project with a zero NPV does not necessarily increase firm value.

If a Manager Is Evaluating a Project That Will Affect