An investment project for which the net present value is $300 would result in which of the following conclusions?
A)The net present value is too small;the project should be rejected.
B)The rate of return of the investment project is greater than the required rate of return.
C)The net present value method is not suitable for evaluating this project;the internal rate of return method should be used.
D)The investment project should only be accepted if net present value is zero;a positive net present value indicates an error in the estimates associated with the analysis of this investment.

Question

Quizplus · Accepted Answer

A net present value of $300 means that the project is expected to generate cash flows that are worth $300 more than the initial investment, when discounted back to the present using the required rate of return. This is a positive and desirable outcome, indicating that the project is expected to be profitable and create value for the investor. Therefore, option B is the correct answer. Option A is incorrect because a positive net present value is a good sign, not a bad one. Option C is incorrect because the net present value method is appropriate for evaluating most investment projects and provides a more accurate measure of value than the internal rate of return. Option D is incorrect because there is no requirement for the net present value to be zero; rather, a positive net present value indicates that the project is expected to create value for the investor.

An Investment Project for Which the Net Present Value Is