What does a positive NPV indicate about a project?

What does a positive NPV indicate about a project?

• A. It is expected to add value to the firm and should be considered for acceptance.
• B. It will always be financed with debt.
• C. It will reduce the firm's cash flow in all years.
• D. It has zero cash inflows.

Answer: (B)

A positive NPV means the project’s expected cash inflows, when discounted at the firm’s required return, exceed the initial investment. In plain terms, the project is expected to create value for shareholders because it earns more than the cost of capital it must cover. Because of that, it should be considered for acceptance, assuming there are no other limiting factors. Financing method isn’t part of what NPV measures. The way you fund the project—debt, equity, or a mix—doesn’t change the inherent value the project creates, though it does affect risk and the company’s capital structure. So a positive NPV signals profitability and value creation, while the financing choice is a separate decision.

A positive NPV means the project’s expected cash inflows, when discounted at the firm’s required return, exceed the initial investment. In plain terms, the project is expected to create value for shareholders because it earns more than the cost of capital it must cover. Because of that, it should be considered for acceptance, assuming there are no other limiting factors.

Financing method isn’t part of what NPV measures. The way you fund the project—debt, equity, or a mix—doesn’t change the inherent value the project creates, though it does affect risk and the company’s capital structure. So a positive NPV signals profitability and value creation, while the financing choice is a separate decision.