Question

What is Net Present Value – NPV

A)An indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest

B)A regulation for evaluating whether to proceed with a project or investment.

C)None of them

D)The difference between the present value of cash inflows and the present value of cash outflows

Answer 1

Solution :

Net Present value – NPV is the present value of an investment's future cash flows minus present value of cash outflows

Thus, Net Present Value = Present value of Cash Inflows minus present value of cash outflows.

As per the NPV Rule or Criteria for evaluating a project’s acceptability

1. If the NPV of the project is Positive i.e., greater than zero, the Project should be accepted.

2. If the NPV of the project is Negative i.e., less than zero, the Project should be rejected.

The solution is Option D) The difference between the present value of cash inflows and the present value of cash outflows

The other options are incorrect due to the following reasons :

Option A) : An indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest

Earnings before Interest and taxes is an indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. Hence, this option is incorrect.

Option B) :A regulation for evaluating whether to proceed with a project or investment.

IRR is a regulation for evaluating whether to proceed with a project or investment. It is the Interest rate at which NPV is zero.

It implies that the Net Present value of all the cash flows discounted at IRR will be equal to zero.

Hence, this option is incorrect.

C)None of them

Option D) is the correct option. Hence Option C does not hold.