Jason, the regional manager for a large electronics firm, is trying to determine whether a new warehouse is a good investment. After working with his firm's financial managers, he concludes that the project carries a negative NPV (Net Present Value). What should Jason do and why?
A) He should invest in the warehouse to increase profits since a negative NPV indicates that the firm needs to generate more funds to stay afloat.
B) He should not invest in the warehouse since a negative NPV means that the present value of the future cash flow does not justify the cost of the warehouse.
C) He should invest in the warehouse since a negative NPV means that the cost of financing the warehouse is within the company's budget for expenses.
D) He should not invest in the warehouse since a negative NPV means the firm doesn't have enough money to afford the investment.

Question

Quizplus · Accepted Answer

A negative NPV means that the cost of the investment exceeds the present value of its expected cash flows. Therefore, Jason should not invest in the warehouse since it would not generate enough profits to justify the cost. Choosing option A, investing in the warehouse to increase profits, is not a valid choice since a negative NPV indicates that the project will result in a net loss. Options C and D are also incorrect because a negative NPV does not provide information about the company's budget or its ability to finance the investment.

Jason, the Regional Manager for a Large Electronics Firm, Is