When a capital budgeting project generates a positive net present value, this means that the project earns a return higher than the
A) internal rate of return.
B) annual rate of return.
C) required rate of return.
D) profitability index.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows of a project to their present value using a required rate of return. If the NPV is positive, it means that the project is generating more value than it costs, and is earning a rate of return higher than the required rate of return (which is also called the hurdle rate). Therefore, the correct answer is C, the required rate of return. A is not necessarily true, as the internal rate of return (IRR) is the discount rate that makes the NPV equal to zero, and the project can still have a positive NPV at a higher discount rate. B is too broad because the annual rate of return can be different from the NPV, especially if the project has uneven cash flows. D is not related to the question because the profitability index is the ratio of the present value of cash inflows to the present value of cash outflows, and is not relevant to whether the NPV is positive or negative.

When a Capital Budgeting Project Generates a Positive Net Present