Which of the following statements about Net Present Value (NPV) is correct?
NPV ignores the time value of money
A positive NPV means the project should be rejected
NPV is the difference between the present value of cash inflows and the initial investment
NPV and IRR always give the same accept/reject decision
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Correct Answer: C — NPV is the difference between the present value of cash inflows and the initial investment
Explanation:
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.