Question

Net present value _____________.

Select one:

a. Requires the firm set an arbitrary cutoff point for determining whether an investment is acceptable

b. Is equal to zero when the discount rate used is less than the IRR

c. Is simplified by the fact that future cash flows are easy to estimate

d. Is equal to the initial investment in a project

e. Compares project cost to the present value of the project benefits

Answer 1

Net present value is one of the measure of capital capital budgeting analysis. Net present value is calculated by present value of future cash flow discounted at cost of capital rate minus value of initial investment. it mean if present value of future cash flow is more than initial investment then net present value of project must be a positive value and in this case project should be accepted. again, if present value of future cash flow is less than initial investment then net present value of project must be a negative value and in this case project should be rejected.

So, Net present value Compares project cost to the present value of the project benefits.

Option (E) is correct answer.