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

Meaning of Zero NPV

Net Present Value means the exact value the project would earn today. It is generally considered that the projects with positive NPV should be considered. Zero NPV means the project would earn the estimated rate or discount rate. A discount rate is that rate in which today's cash flows from a particular investment are discounted or the present value of cash flows is calculated by using the discount rate. For example, the value of $ 10,000 would be $ 8,000 after 5 years, or the value of today's money would get reduced after 5 years. This calculation means calculating the present value of money and the rate taken to calculate the present value is called discount rate. So, zero NPV means the project would cover its discounted value. If NPV is positive then project would earn profits.

In short, zero NPV indicated no profit, no loss or a break even situation for the project. It tells that there's neither profit and nor loss if this project is undertaken.

Zero NPV = Present Value of Inflows = Present Value of Outflows

Considering a Project with Zero NPV:

Only One Factor is there that can attract the investor to choose the project that is Opportunity Costs. The investor can select the project if there are opportunity costs are aligned because the project is just earning the discounted cash flows which means there is no additional benefit involved in terms of money. Opportunity cost means the cost of loosing a particular opportunity or investment. For example XYZ Company is considering to buy laptops from ABC Company and the project is earning zero NPV, but ABC company is the only company having latest technology which is offering free laptop tables with their laptops for free which any other company doesn't, so the company can opt this project because the opportunity cost of free tables is called opportunity cost for XYZ.