Question
Question 14 In the net present value method of investment appraisal, the decision rule is to __ the project if NPV is negative. reject accept 3 pts
Answer
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Eli
Veteran · Tutor for 9 years
Answer
In the net present value method of investment appraisal, the decision rule is to '**reject**' the project if NPV is negative.
Explanation
## Step1:The initial step is to understand the concept of the Net Present Value (NPV). The NPV is a financial metric that is commonly used for measuring the profitability of investment projects. It is the difference between the present value of cash inflows–which are predicted profits from an undertaking– and the present value of cash outflows – which equates to the cost of the project. Therefore, it signifies the net cash flow of the project.### The formula for NPV is:**\(NPV = \sum _{{t=1}}^{n} \frac{{R_t - C_t}}{{(1 + i)^t}} | Where, \\R\_t = Cash inflow in time period t, \\C\_t = Cash outflow in time period t, \\i = Discount rate or cost of capital, \\n = Life of the investment** A positive net present value indicates that the anticipated revenues of a project will exceed its costs, making the initiative a sound investment. Conversely, a negative NPV suggests that the costs will likely surpass the projected earnings (negligible or restricted profit), hence remaining as poor to average investment.## Step2:The consultation of the decision rule of investment based on NPV. Utilizing the NPV, decision-makers can choose whether to embark on the investment project or not. As previously stated, a positive NPV indicates a probable profitable investment, hair-triggering confidence in decision makers to select the project. Conversely, due to anticipated financial loss or limited earned value, a negative NPV injects hesitation into investors and normally leads to the project being disregarded. ## Step3:To carry out the expression required by the question in line with NPV rule, it becomes manifest that if NPV of a project is negative, which refers to lesser earnings and discourages investment, one ought to '**reject**' the project.