The net present value:
A)decreases as the required rate of return increases.
B)is equal to the initial investment when the internal rate of return is equal to the required return.
C)method of analysis cannot be applied to mutually exclusive projects.
D)is directly related to the discount rate.
E)is unaffected by the timing of an investment's cash flows.

Question

Quizplus · Accepted Answer

The net present value decreases as the required rate of return increases because a higher required return makes future cash flows worth less in today's dollars.

Answer: B 
 When the internal rate of return equals the required return, the net present value is zero, which means the project's cash inflows equal its outflows.

Answer: C 
 The net present value method can only be used to compare mutually exclusive projects if they have the same initial investment amount.

Answer: D 
 The net present value is directly related to the discount rate because the discount rate represents the opportunity cost of investing in the project.

Answer: E
 The timing of an investment's cash flows can affect its net present value because earlier cash flows are worth more in today's dollars than later cash flows due to the time value of money.

The Net Present Value