Chapter 5 FIN 519 MC

Which one of the following statements concerning net present value (NPV) is correct?

An investment should be accepted if the NPV is positive and rejected if it is negative.

All else equal, the payback period for a project will decrease whenever the

cash inflows are moved earlier in time.

The discounted payback period rule

considers the time value of money.

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the

payback period

The discounted payback rule may cause

some positive net present value projects to be rejected & some projects with negative net present values to be accepted.

If a project has a net present value equal to zero, then

the project produces a rate of return that just equals the rate required to accept the project, the project is expected to produce only the minimally required cash inflows, any delay in receiving the projected cash inflows will cause the project to have a negative net present value.

All else constant, the net present value of a typical investment project increases when

the rate of return decreases

The problem of multiple IRRs can occur when

there is more than one sign change in the cash flows

Which of the following does not characterize NPV?

NPV does not explicitly incorporate risk into the analysis