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CA Foundation · Quantitative Aptitude · Mathematics of Finance

Under the NPV decision rule for an independent project with conventional cash flows, which statement is correct?

Accept the project if its NPV is positive at the cost of capital. A positive NPV means the discounted inflows exceed the outlay, so the project earns more than the required return. This is equivalent to the IRR being higher than the cost of capital.

  1. AAccept the project if its NPV is positive at the cost of capitalCorrect
  2. BAccept the project only if its payback period exceeds its life
  3. CReject the project if its IRR exceeds the cost of capital
  4. DAccept the project if its NPV is negative at the cost of capital

Explanation

A positive NPV at the cost of capital means the project earns more than the required return, so it adds value and should be accepted. Equivalent to this, the IRR exceeds the cost of capital, so rejecting when IRR is higher would be wrong. A negative NPV signals value loss.

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