Question

You realize that the NPV of a project under consideration is $0. How would you proceed with the project? Discuss - in a maximum of half a page length - the principles that will guide your decision-making for this project.

Answer 1

NPV zero projects don't add any incremental value purely in monetary terms. At the same time it doesn't erode any value as well.

When we arrive at zero NPV situation, our decision should be guided by following factors:

1. Is there any non monetary or non quantifiable benefit from the project? Is the project adding value on the qualitative terms such as:
   • Improvement in Company culture
   • Enhances company's reputation
   • Its alignment with the long term strategy, mission and vision
   • Urgency to do the project
   • Improves Employees’ morale
   • Enhances investors and customers image
   • Related to legal matters
   • Required by Regulatory environment
2. If the project scores well on some or many of these qualitative consideration, then one should proceed with the project.
3. Another way to look at zero NPV project is to examine the opportunity cost. Opportunity costs are cash flows which would be lost if a project is undertaken. Example: If a project uses up land already owned by the company, the cost of land is an opportunity cost as the firm could have found alternative methods to monetize the land by renting it or selling it. If there is a significant opportunity costs involved, then the project should not be undertaken.