Which of the following statements about the net present value method of selectin
ID: 2648227 • Letter: W
Question
Which of the following statements about the net present value method of selecting
projects is true?
a) For two mutually exclusive projects, the net present value and internal rate of
return methods select different projects if the required rate of return is greater
than the discount rate at which the two net present value profiles intersect.
b) If projects are independent, then the project with the highest net present value
(providing it is greater than zero) is accepted.
c) If the projects are mutually exclusive, then all projects with a net present value
greater than zero are accepted.
d) If a project's cash flows are positive after discounting them by the required
rate of return, then it may be accepted if there are no better alternatives.
Explanation / Answer
Answer: d) If a project's cash flows are positive after discounting them by the required rate of return, then it may be accepted if there are no better alternatives.
Discounted cash flow greater than 0 (positive) means that the project generates positive returns and the same maybe accpeted if there is no better alternative available.
Also if projects are independent all of them can be accepted if they add value. The company can accept all projects with positive NPV provided there is no constraint of investment. (Statement b is not true)
If projects are mutually exclusive, selection of one project will not permit selection of the other project. Hence all projects cannot be selected. (Statement c is not true)
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