Question

While making a capital investment decision using the net present value (NPV) method, a project is selected if:

(A) NPV is greater than zero
(B) NPV is less than the company's current year's earnings
(C) NPV is greater than the project's initial cost
(D) NPV is less than the project's payback period

Answer 1

A project is selected using Net Present Value method if the NPV is greater than zero, as it suggests the investment will be profitable considering the time value of money.

Step-by-step explanation:

When making a capital investment decision using the Net Present Value (NPV) method, a project is selected if the NPV is greater than zero. The NPV is a calculation that compares the present value of cash inflows with the present value of cash outflows over time. A positive NPV indicates that the projected earnings (in present dollars) exceed the anticipated costs (also in present dollars), which usually means the investment is profitable and can be considered. The NPV incorporates the time value of money, acknowledging that future cash flows are not as valuable as immediate cash flows.