Question
Which of the following statements are correct? (Select the correct answer from those listed below the following statements). (1) Accept the project if the NPV is >0 (2) IRR is when NPV is zero (3) Accept the project if the NPV=0 (4) NPV does not consider the time value of money (1) and (2) are correct (1) and (3) are correct (1), (2) and (3)are correct (1), (2) and (4)are correct
Answer
4.5
(314 Votes)
Robert
Master · Tutor for 5 years
Answer
(1), (2) and (3) are correct.
Explanation
## Step 1:Let's analyze each statement. Starting with, Statement 1 - Accept the project if the NPV (Net Present Value) is
This statement is correct. The Net Present Value (NPV) method is used in investment appraisal to analyze the profitability of a project or investment. If NPV is greater than zero, this indicates that the project's earnings (the returns from the project) are greater than the costs and therefore, the project can be considered a good enough investment and should be accepted.## Step 2:Next, Statement 2 - IRR is when NPV is zero.Again, this statement is correct. The IRR (Internal Rate of Return) is the discount rate or the interest rate that brings the NPV of an investment plan proposal to zero. At the level of IRR, the projected cash inflows precisely balance the cash outflows leading to NPV equal to zero. ## Step 3:Now, Statement 3 - Accept the project if the NPV
This statement can be considered as partially correct as projects where the NPV equals zero can still be accepted. This means the project or investment is breaking even, that is, total costs are exactly recovering and it is not losing money.## Step 4:Finally, statement 4 - NPV does not consider the time value of moneyThis statement is false honestly. The very essence and principle of NPV is its affirmation and use of the time value of money concept. The NPV method adjusts each inflow and outflow for the time value of money to give us a net present value as of now in today's terms.### Final decision:After going through each statement, we have evaluated that statement (1), (2), and (3) are all valid according to the principles of financial decision making, whereas statement (4) is incorrect.