COST ACCOUNTING
CAPITAL BUDGETING
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]


If NPV is positive, the project is expected to earn more than the firm’s cost of capital.


Accepting negative NPV projects will increase shareholders’ wealth.


If the NPV is negative, the project’s cost is less than the project’s expected benefit.


When calculating NPV, cash flow after the payback period is ignored

Detailed explanation1: The correct answer is A) Accept a project if NPV > cost of investment. The net present value estimates the current worth of a project by taking the present value of the future cash flows minus the cost of investment. The decision rule for the NPV method is to accept projects that have a positive NPV.
Detailed explanation2: The IRR must be greater than 0 is true if the Net Present Value (NPV) of a positive.
Detailed explanation3: Top Answer In case, the NPV is positive, the IRR of the project also exceeds the required return.
Detailed explanation4: If NPV is positive, the project is expected to earn more than the firm’s cost of capital. Accepting negative NPV projects will reduce shareholders’ wealth. If the NPV is positive, the project’s cost is less than the project’s expected benefit.
Detailed explanation5: NPV helps in deciding whether it is worth to take up a project basis the present value of the cash flows. After discounting the cash flows over different periods, the initial investment is deducted from it. If the result is a positive NPV then the project is accepted. If the NPV is negative the project is rejected.