What is the Net Present Value rule for investment decisions?

What is the Net Present Value rule for investment decisions?

• A. Accept if NPV > 0, reject if NPV ≤ 0
• B. Accept if NPV < 0
• C. Accept if NPV = 0
• D. Accept if NPV ≥ 0.5

Answer: (A)

Net present value measures how much value a project adds after accounting for the time value of money and the cost of capital. The decision rule is to accept only if NPV is positive because a positive NPV means the discounted inflows exceed the outflows, thereby increasing shareholder wealth. If NPV is zero, the project earns exactly the required return and does not create additional value; this problem’s rule chooses to reject at zero. If NPV is negative, the project would destroy value and should be rejected.

Net present value measures how much value a project adds after accounting for the time value of money and the cost of capital. The decision rule is to accept only if NPV is positive because a positive NPV means the discounted inflows exceed the outflows, thereby increasing shareholder wealth. If NPV is zero, the project earns exactly the required return and does not create additional value; this problem’s rule chooses to reject at zero. If NPV is negative, the project would destroy value and should be rejected.