In using the net present value method, only projects with a zero or positive net present value are acceptable because ________.
A) the return from these projects equals or exceeds the cost of capital
B) a positive net present value on a particular project guarantees company profitability
C) the company will be able to pay the necessary payments on any loans secured to finance the project
D) it results in high payback period

Question

Quizplus · Accepted Answer

The net present value method takes into account the time value of money and compares the present value of cash inflows to the present value of cash outflows. Only projects with a zero or positive net present value are acceptable because they generate a return that equals or exceeds the cost of capital, which is the rate of return required by investors or financiers to invest in a project. Thus, the company can expect to earn a profit on the investment and cover the cost of financing. A positive net present value on a particular project does not guarantee company profitability but rather indicates that the project will generate more cash inflows than outflows. The ability to pay the necessary payments on any loans secured to finance the project is not the only concern when evaluating project profitability as the company must generate a return on the investment that exceeds its cost of capital. The net present value method does not take into consideration the payback period, which is a separate method for evaluating investment projects.

In Using the Net Present Value Method, Only Projects with a Zero