The "value additivity principle" means that the ____.
A) firm should accept all projects with a positive net present value
B) firm's value is the sum of the value of all the projects undertaken
C) firm will grow through the addition of new projects
D) positive net present value is added to the firm's net worth

Question

Quizplus · Accepted Answer

The value additivity principle means that the value of the firm is the sum of the value of all the projects undertaken. This principle is important in capital budgeting decisions because it helps managers to prioritize projects that will create the most value for the firm. By selecting projects with positive net present values, managers can ensure that they are adding value to the firm's net worth. However, accepting all projects with a positive net present value (option A) may not be feasible due to resource constraints. Option C is incorrect because growth through the addition of new projects is not necessarily guaranteed to create value for the firm.

The "Value Additivity Principle" Means That the ____