1.
Which of the following statements about Net Present Value (NPV) is correct?
A
NPV ignores the time value of money
B
A positive NPV means the project should be rejected
C
NPV is the difference between the present value of cash inflows and the initial investment
D
NPV and IRR always give the same accept/reject decision
Answer and explanation
Correct Answer: C — NPV is the difference between the present value of cash inflows and the initial investment
The correct answer is C: NPV is the difference between the present value of cash inflows and the initial investment.
NPV accounts for the time value of money by discounting future cash flows. A positive NPV indicates the project adds value and should be accepted; a negative NPV means it should be rejected. NPV and IRR may occasionally give conflicting decisions when evaluating mutually exclusive projects.