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18 June, 10:42

A company has an opportunity cost of capital of 9.5%. Which of the following is the most acceptable investment for this company? A) An investment with an NPV of $5. B) An investment with an NPV of ($5). C) An investment with an IRR of 9.0% D) An investment with an NPV of 0.

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  1. 18 June, 10:58
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    A

    Explanation:

    NPV is net present value. It is the sum of all cash flows in present value discounted at a rate (known as discount rate, cost of capital or WACC)

    A company will never choose a project with a NPV that is negative because the company will not only recover the investment it will destroy value. That is why B is not the correct answer

    A project with an NPV of 0 will recover the initial investment but will not generate other revenue, it will not create or destroy value.

    The IRR or Internal Rate of Return is the discount rate that makes the Net Present Value (NPV) equal to cero. So, if the problem says that the cost of capital is 9.5% but the IRR is 9% which is the maximum cost that the investor can accept, then the proyect will be unfeasible.

    Then the correct answer is the investment with a positive NPV that creates value to the company.
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Home » Business » A company has an opportunity cost of capital of 9.5%. Which of the following is the most acceptable investment for this company? A) An investment with an NPV of $5. B) An investment with an NPV of ($5). C) An investment with an IRR of 9.
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