Jason,the regional manager for a large electronics firm,is trying to determine whether a new warehouse is a good investment.After working with his firm's financial managers,he concludes that the project carries a negative net present value.What should Jason do-and why?
A)Not invest in the warehouse-a negative NPV means the firm doesn't have enough money to afford the investment.
B)Invest in the warehouse-a negative NPV means that the cost of financing the warehouse is less than the cost of any other investment.
C)Not invest in the warehouse-a negative NPV means that the present value of the positive cash flows are not high enough to justify the costs of the warehouse.
D)Invest in the warehouse-a negative NPV indicates that failing to do so will reduce the value of the firm to its shareholders.

Question

Quizplus · Accepted Answer

A negative NPV indicates that the costs of the investment outweigh the present value of the expected cash flows. Therefore, investing in the warehouse would not be profitable and would not be justified by the possible benefits. Option A is incorrect because the negative NPV does not necessarily mean that the firm cannot afford the investment; it simply means that the investment would not be profitable. Option B is incorrect because a negative NPV implies that the investment cost is higher than the expected cash flows, regardless of the cost of financing. Option D is incorrect because a negative NPV does not necessarily mean that failing to invest will reduce the value of the firm to shareholders.

Jason,the Regional Manager for a Large Electronics Firm,is Trying to Determine