When a capital budgeting project has an NPV of zero, what does this mean? The project’s...

When a capital budgeting project has an NPV of zero, what does this mean?

The project’s IRR will be less than the required hurdle rate for the project

The firm’s stockholders will earn a positive return, but it will be less than their required return, given the risk of the investment

The firm’s stockholders will earn a negative return

The firm’s security holders will earn their required rate of return, given the risk of the investment

none of the above

Solutions

Expert Solution

Correct option is :- The firm's security holders will earn their required rate of return ,given the risk of the Investment.

Explanation:- NPV is calculated by the following formula :-

Present value of cash inflows discounted at required rate of return less Initial net Investment

Now,If NPV = 0 ,then it means when cash flows are discounted using required rate of return then NPV =0 and hence At discount rate = required rate of return , present value of cash inflows is equal to Initial net Investment in the given scenario.

And Rate of return which firm earns on project i.e,IRR is the rate at which Present value of cash inflows is equal to Initial net Investment

Hence when NPV=0 then IRR will be equal to required rate of return

jeff jeffy answered 1 year ago

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