Question

When analyzing the purchase of a capital asset, the Net Present Value was equal to $500, but the Internal Rate of Return and the Payback Period were both below preferred levels. How should you proceed?

		Decline the opportunity, because in business, nothing is worth doing for only $500.
		Accept the opportunity because the NPV is above zero.
		Decline the opportunity since two of the three analysis conclude you should decline.
		Do not act on this. Wait for some time to pass and do the analysis again.

Answer 1

Accept the opportunity because the NPV is above zero.

A project should be accepted if the NPV is positive since this implies that there is value addition by the project.

Option 1 is incorrect since even if the NPV is only $500, there is a positive addition. Keeping resources idle will entail opportunity cost.

Option 3 is incorrect since the decision should be based on NPV and not IRR or pyaback.

Option 4 is incorrect since passing more time will change the statistics and the opportunity to gain may be lost.