When a project generates cash flows exceeding the invested capital for the required rate of return, its net present value will be _________?
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Answer: A. positive
Explanation
Net present value is positive when project cash flows exceed invested capital at required rates. A positive net present value indicates that the investment creates value for the business entity. Discounting future cash flows above the hurdle rate results in a positive valuation sum. Capital budgeting techniques use net present value to evaluate the profitability of proposed projects. The required rate of return reflects the minimum acceptable yield considering risk and capital costs. Time value of money principles state that a dollar today is worth more than tomorrow.
Firms accept investment projects displaying positive net present values to maximize shareholder wealth. Financial managers calculate cash flow projections carefully before committing substantial capital resources. Capital allocation decisions determine the long-term growth and competitiveness of business enterprises. An independent project classification refers to selection criteria rather than cash flow outcomes. A negative net present value occurs when project returns fail to meet the required hurdle rate. A zero net present value happens when cash flows exactly match the required rate of return.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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