Question
While evaluating a project, if the Net Present Value
(NPV) of the project is greater than zero, it implies ________.Solution
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over the life of a project. • If NPV > 0 → The project generates returns above the required rate of return, thereby increasing the firm’s value. • If NPV = 0 → The project neither adds nor reduces value, making the firm indifferent to the investment. • If NPV < 0 → The project reduces value and should be rejected. Thus, a positive NPV clearly implies that the project will increase the firm’s value and is financially viable.
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