Question

Which of the following is not a net present value (NPV) decision rule? A        When choosing...

Which of the following is not a net present value (NPV) decision rule?

A        When choosing among independent projects, select the one with the highest rate of return

B        If an independent investment’s NPV is negative, reject the project

C        If an independent investment’s NPV is positive, accept the project

D        When choosing among mutually exclusive projects, select the one with the highest NPV

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Answer #1

Project 'A' is correct

In case of an independent project select the project with the highest NPV and reject the project with negative NPV. In case of mutually exclusive projects, the project with highest NPV or highest IRR or the lowest payback period are to be selected.

When choosing among independent projects select the one with the highest rate of return is a IRR decision rule and not the Net present value decision rule.

So, Option 'A' is not a Net present value (NPV) decision rule.

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