In capital budgeting analysis, the use of a cumulative NPV is useful for:
A) determining a probability distribution of NPVs.
B) determining the time required to achieve a positive NPV.
C) determining how the required rate of return changes over time.
D) determining how the cost of capital changes over time.
E) determining a probability distribution of NPVs AND determining the time required to achieve a positive NPV.

Question

Quizplus · Accepted Answer

The use of a cumulative NPV helps in determining the time required to achieve a positive NPV. By adding up the annual NPVs over time, the cumulative NPV starts negative at the beginning of the project and becomes positive at the point when the total NPV becomes positive. This helps in identifying when the project will start generating positive returns and how long it will take to reach that point. The other options do not relate to the use of a cumulative NPV.

In Capital Budgeting Analysis, the Use of a Cumulative NPV