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    Question

    While evaluating a project, if the Net Present Value

    (NPV) of the project is greater than zero, it implies ________.
    A The investment would reduce the value of the firm Correct Answer Incorrect Answer
    B The investment would increase the value of the firm Correct Answer Incorrect Answer
    C The investment would be neutral for the value of the firm Correct Answer Incorrect Answer
    D The investment would reduce or be neutral for the value of the firm Correct Answer Incorrect Answer
    E The investment would increase or be neutral for the value of the firm Correct Answer Incorrect Answer

    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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