Which of the following best describes the Net Present Value rule?

A) When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV).

B) Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative.

C) If the difference between the present cost of an investment and the present value (PV) of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected.

D) Take any investment opportunity where the net present value (NPV) exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV)

Question

Jeffery Dalton

Business

15 September, 21:22

Which of the following best describes the Net Present Value rule?

A) When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV).

B) Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative.

C) If the difference between the present cost of an investment and the present value (PV) of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected.

D) Take any investment opportunity where the net present value (NPV) exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV)

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Answers (1)

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Irvin Zuniga · Answer 1

(B) Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative.

Explanation:

Net present value (NPV) simply differentiates between the present value of cash inflows and the present value of cash outflows.

And the rule is that a company should only invest or be engaged in any business that has a positive net present value and exclude themselves from businesses that have been negative net present value as this can increase the company's income.