Question

The NPV rule states that, “An investment should be accepted if the net present value ( 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?

Answer 1

If a project has a NPV equal to zero, it means that the project has produced a return rate which equals the required rate of return to accept the project. This rate of return is called Internal Rate of Return or IRR.

In such cases, the project which has to be accepted is decided on the basis of minimal requirement of cash inflows by respective projects. Another criteria to accept a Zero NPV project is that Shorter the project period will be accepted to the longer period project.

There could be other criteria like higher Accounting rate of return of a project, pay-back period method.

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