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IAI Actuarial Core Principles · Business Finance · Key principles of finance

Which statement about the NPV rule for accepting an independent project is correct?

Accept the project if its NPV, calculated by discounting expected cash flows at the cost of capital, is positive. That shows the project earns more than the required return and increases shareholder wealth, unlike payback or undiscounted comparisons.

  1. AAccept if the accounting rate of return exceeds the cost of capital
  2. BAccept if NPV, discounting at the cost of capital, is positiveCorrect
  3. CAccept if the undiscounted cash inflows exceed the outlay
  4. DAccept if payback is within the project's life
  5. Accept if the IRR is below the cost of capital

Explanation

A positive NPV at the cost of capital means the project returns more than required and adds value to shareholders. Undiscounted and payback tests ignore time value, and an IRR below the cost of capital signals rejection.

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