Question

Chris has estimated the NPV of his company's project to expand its operations at $3.8 million. This means: Multiple Choice

a)The project's discounted cash flows are $3.8 million more than its profit.
b)The cash inflows of the project exceed the cash outflows by $3.8 million
c)The project's required rate of return is more than WACC of the company
d)The project will increase the company's accounting profit by $3.8 million
e)The project is increasing the value of the company's stock by $3.8 million.

Answer 1

A positive NPV of $3.8 million indicates that the cash inflows expected from the project, discounted for the time value of money, exceed the project's cash outflows by $3.8 million, signifying a potentially profitable investment for the company.

Step-by-step explanation:

If Chris has estimated the NPV (Net Present Value) of his company's project to expand its operations at $3.8 million, this indicates that option b) The cash inflows of the project exceed the cash outflows by $3.8 million is the correct answer.

NPV is a financial measurement that adjusts for the time value of money by discounting the project's expected cash flows to their present value. A positive NPV means that the project's returns exceed the hurdle rate, usually the company's weighted average cost of capital (WACC). It does not directly correspond to accounting profit or stock value increments but reflects the project's contribution to the company's value from a financial perspective.