A project has a net present value of $1,200 and a project life of 4 years.Which one of these statements must be true?
A)The project's total cash inflows minus its cash outflows equals $1,200.
B)The project is expected to return $1,200 in Time 0 dollars over and above the discount rate.
C)The project would also have a positive net present value if Year 4 was omitted.
D)The project's cash inflows exceed its outflows by $1,200 over the 4 years.
E)The project is expected to return $1,200 in Year 4 dollars over and above the initial investment.

Question

Quizplus · Accepted Answer

The net present value of a project represents the present value of all expected cash inflows minus the present value of all expected cash outflows, discounted at a specific rate. Therefore, a positive net present value of $1,200 means that the project is expected to return $1,200 in Time 0 dollars over and above the discount rate. Statement A cannot be true because the net present value is a present value, not a future value. Statement C is incorrect because omitting Year 4 may change the net present value of the project. Statement D is incorrect because the net present value is not equal to the difference between cash inflows and cash outflows. Statement E is incorrect because the net present value represents present values, not future values.

A Project Has a Net Present Value of $1,200 and a Project