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Topic
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Study Text:
The present value of expected cash flows is determined by discounting those flows to their present value using the firm’s cost of capital as the discount rate. The difference between the resulting present value and the initial cost is the net present value of the project. If the net present value is zero or positive, the project is deemed economically acceptable; if the net present value is negative, the project is deemed unacceptable.
A project should be accepted if the present value of cash flows from the project is:
A. Equal to the initial investment.
B. Less than the initial investment.
C. Greater than the initial investment.
D. Equal to zero.
Answer: D
The present value of future cash flows from a project is subtracted from the initial cost of the investment to determine the economic feasibility of the project. If the present value of future cash flows is greater than the initial cost of the investment, the project has a positive net present value and is economically feasible – it should be accepted. If the present value of future cash flows is not greater than the initial cost of the investment, the project should not be accepted.
So why does the study text say a project is acceptable is NPV is 0 or greater, but the answer says only greater than 0?
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