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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Using NPV, a project is rejected if it is

  1. a. equal to zero.
  2. b. negative.
  3. c. positive.
  4. d. equal to the required rate of return.
  5. e. greater than the cost of capital.

To determine

Identify the reason of rejecting a project using NPV.

Explanation

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

b.

The project is rejected when NPV is negative because it decreases the value of the firm. Therefore, option b is the correct answer.

a.

The project is not rejected when NPV is zero because it is a breakeven situation...

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