Which one of the following statements concerning net present value (NPV) is correct?
A)An investment should be accepted if, and only if, the NPV is exactly equal to zero.
B)An investment should be accepted only if the NPV is equal to the initial cash ﬂow.
C)An investment should be accepted if the NPV is positive and rejected if it is negative.
D)An investment with greater cash inﬂows than cash outﬂows, regardless of when the cash
ﬂows occur, will always have a positive NPV and therefore should always be accepted.
E)Any project that has positive cash ﬂows for every time period after the initial investment
Should be accepted.

Question

Quizplus · Accepted Answer

NPV is the difference between the present value of cash inflows and the present value of cash outflows. A positive NPV indicates that the project is expected to generate more cash inflows than outflows and therefore should be accepted. A negative NPV indicates that the project is expected to generate less cash inflows than outflows and therefore should be rejected. Zero NPV means that the project will exactly generate enough cash inflows to cover the initial investment, but it does not necessarily provide a positive return, so it is not the only criteria to accept or reject. Choice A and B are incorrect because they do not consider the magnitude of NPV. Choice D is incorrect because the timing of cash flows is important in determining NPV, not only the absolute amount of cash inflows and outflows. Choice E is also incorrect because it does not consider the discount rate used to calculate the present value of cash flows.

Which One of the Following Statements Concerning Net Present Value