A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is true?
A) NPV is positive if the required return is less than 10%.
B) NPV is negative if the required return is less than 10%.
C) NPV is zero if the required return is equal to 10%.
D) Both NPV is positive if the required return is less than 10%; and NPV is zero if the required return is equal to 10%.
E) None of these.

Question

Quizplus · Accepted Answer

The investment produces a total cash flow of $27.50, which is $2.50 more than the initial investment of $25. This means that the net present value (NPV) of the investment is positive. The required return can be calculated using the formula: 
Required Return = (Ending Value / Beginning Value)^(1/Time) - 1 = ($27.50 / $25)^(1/1) - 1 = 0.10 or 10%
If the required return is less than 10%, then the NPV will be positive. If the required return is equal to 10%, then the NPV will be zero. Therefore, choice D is correct. Choices A, B, C, and E are incorrect.

A $25 Investment Produces $27