Which of the following statements is true of a capital budgeting project with negative net present value (NPV)?

Question

Quizplus · Accepted Answer

A negative NPV indicates that the project's expected cash flows do not cover the initial investment and future cash flows, discounted using the firm's required rate of return, are lower than the initial investment. This means the project is not worthwhile to pursue. Option A is incorrect because the IRR is the discount rate at which NPV is zero or the project's actual return. If NPV is negative, then IRR is lower than the required rate of return. Option C is incorrect because the initial investment is already sunk cost and should not be a determinant of whether to invest. Option D is incorrect because the traditional payback does not consider discounted cash flows and is not suitable for capital budgeting decisions. Option E is incorrect because a higher IRR than the discount rate results in positive NPV, not negative NPV. Option B is correct because the discounted payback period shows the number of years it takes for the discounted cash flows to cover the initial investment. If the discounted payback period is longer than the project's economic life, the investment is not worthwhile.

Which of the Following Statements Is True of a Capital