Question

Which one of the following statements is correct? Net present value is equal to an investment's cash inflows discounted to today's dollars. The net present value is positive when the required return exceeds the internal rate of return. The net present value is a measure of profits expressed in today's dollars. If the internal rate of return equals the required return, the net present value will equal zero. If the initial cost of a project is increased, the net present value of that project will also increase.

Answer 1

The first statement is incorrect because net present value is equal to present value of cash inflow less present value of cash outflow. This mean both cash inflow and outflow are considered in today's dollars.

The second statement is incorrect as it is not necessary that NPV would be positive when required return is higher than internal rate of return.

The third statement is incorrect as net present value is measure of net cash generated from investment in today's dollars.

The fifth statement is also incorrect as increase in initial cost of project would decrease net present value and not increase.

The fourth statement is correct that is if internal rate of return is equal to required return then net present value would be zero as internal rate of return is the return at which the cash flows if discounted would result in zero net present value.

Thus, fourth statement is correct