To avoid rejecting projects that actually should be accepted,
1. intangible benefits should be ignored.
2. conservative estimates of the intangible benefits' value should be incorporated into the NPV calculation.
3. calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate whether the intangible benefits are worth at least the amount of the negative NPV.
A) 1
B) 2
C) 3
D) both 2 and 3 are correct.

Question

To avoid rejecting projects that actually should be accepted,
1.	intangible benefits should be ignored.
2.	conservative estimates of the intangible benefits' value should be incorporated into the NPV calculation.
3.	calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate whether the intangible benefits are worth at least the amount of the negative NPV.
A)	1
B)	2
C)	3
D)	both 2 and 3 are correct.

Quizplus · Accepted Answer

Net present value (NPV) is a financial technique used to determine the value of an investment by calculating the present value of expected cash flows, adjusted for time and the cost of capital. When calculating NPV, only tangible benefits are considered, meaning the monetary benefits a project will provide.

If the NPV is negative, it generally indicates that the project will not generate enough cash to cover the initial investment, as well as the time value of money. In this case, a company should consider whether there are any intangible benefits that could justify the investment. Intangible benefits are the non-monetary benefits that a company may gain from a project. For example, an investment in employee training may not generate a positive NPV, but it may have intangible benefits such as improving employee morale and reducing turnover.

Therefore, if the NPV is negative, a company should estimate whether the intangible benefits are worth at least the amount of the negative NPV. This analysis should be done on a case-by-case basis, and the company needs to consider factors such as the nature of the intangible benefits, the likelihood of realizing those benefits, and their value.

Thus, both 2 and 3 are correct as they both indicates the correct method to analyze the situation.

To Avoid Rejecting Projects That Actually Should Be Accepted