COST ACCOUNTING
CAPITAL BUDGETING
Question
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produces a net present value that is greater than or equal to zero.


produces a net present value that is greater than the equivalent IRR.


has only one sign reversal.


produces a profitability index greater than or equal to zero.

Detailed explanation1: According to the net present value theory, investing in something that has a net present value greater than zero should logically increase a company’s earnings. In the case of an investor, the investment should increase the shareholder’s wealth.
Detailed explanation2: If the NPV is greater than $0, the project is accepted. Otherwise the project is rejected. The NPV is defined by its: r, which is the discount rate per period.
Detailed explanation3: An acceptable project should have a net present value greater than or equal to zero and a profitability index greater than or equal to one. Whenever the internal rate of return on a project equals that project’s required rate of return, the net present value equals zero.
Detailed explanation4: The acceptance rule for independent projects is to accept all projects where the IRR is above the required return (hurdle rate) for those projects. If projects are mutually exclusive, accept the one with the highest IRR (assuming it is above the hurdle rate).
Detailed explanation5: Independent projects: If NPV is greater than $0, accept the project. Mutually exclusive projects: If the NPV of one project is greater than the NPV of the other project, accept the project with the higher NPV. If both projects have a negative NPV, reject both projects.