Question

1. NPV

According to the text, the NPV rule states that "An investment should be accepted if the NPV is positive and rejected if it is negative." What does an NPV of zero mean? If you were a decision-maker faced with a project with a zero NPV (or very close to zero) what would you do? Why?

2. FORECASTING ERROR (RISK)

What is a "forecasting error"? Why is it important to the analysis of capital expenditure projects?

please, original work.

Answer 1

Dear student, only one question is allowed at a time. I am answering the first question

1)

Net Present value is the value of all cash inflows receivable from the project discounted at required rate of return less the value of all outflows payable in the project discounted at required rate of return

If Net Present value is positive, it means the project is earning more than the required rate of return as the present value of inflows is more even after discounting them at required rate of return. So, at a positive NPV, it is recommended to accept the project as the actual rate of return that is, IRR, is higher than the required rate of return

If Net Present value is negative, it means the project is earning less than the required rate of return as the present value of inflows is less after discounting them at required rate of return. So, at a negative NPV, it is recommended to reject the project as the actual rate of return that is, IRR, is lower than the required rate of return

If Net Present value is zero, it means the project is earning exactly the required rate of return as the present value of inflows is same as present value of outflows after discounting them at required rate of return. So, at a zero NPV, it is recommended to accept the project as the actual rate of return that is, IRR, is same as the required rate of return. So, if there is zero NPV, I will accept the project but if it is very close to zero on a lower side ( negative ), it means the project is not generating the required rate of return and so it should be rejected