Question

2. A firm has a target rate of return of 15% and calculated a negative net present value for a project. That means the project will earn:

a. more than 0%. b. less than 0%.
c. more than 15%. d. less than 15%.

3. Capital budgeting decisions include: a. the time value of money.

b. a target rate that a project must exceed to be accepted. c. both of the above.
d. none of the above.

Answer 1

2. b. Less than 0%

If NPV is positive, that means that the value of the revenues (cash inflows) is greater than the costs (cash outflows). When revenues are greater than costs, the investor makes a profit. The opposite is true when the NPV is negative. When the NPV is 0, there is no gain or loss.

3. Both of the above

Capital budgeting is a company's formal process used for evaluating potential expenditures or investments that are significant in amount. It involves the decision to invest the current funds for addition, disposition, modification or replacement of fixed assets