Question

In a capital budgeting decision, if a firm uses the net present value method and a 12%

discount rate, what does a negative net present value indicate?
A. the proposal's rate of return exceeds 12%.
B. the proposal's rate of return is less than the minimum rate required.
C. the proposal earns a rate of return between 10% and 12%.
D. none of the above.

Answer 1

A negative net present value at a 12% discount rate indicates that the investment's rate of return is less than the minimum rate required. Option B

Step-by-step explanation:

When a firm uses the net present value (NPV) method for capital budgeting decisions, it discounts future cash flows back to their value in today's dollars using a discount rate. If the firm uses a 12% discount rate and the calculation results in a negative NPV, this indicates that the proposal's rate of return is less than the minimum rate required, which is option B.

Essentially, the negative NPV means that the expected cash flows from the investment, when discounted at the 12% rate, are less than the initial outlay for the investment. It does not provide enough return to cover the cost of capital at the given rate, making the investment unattractive. Option B