Question

For "normal" cash flows (the outflows occur before the inflows), the NPV is ______ if the discount rate is less than the IRR, and it is ______ if the discount rate is greater than the IRR.

a) Positive, negative
b) Negative, positive
c) Zero, positive
d) Positive, zero

Answer 1

The Net Present Value (NPV) for normal cash flows is positive when the discount rate is less than the IRR and negative when the discount rate is greater than the IRR; the correct choice is a) Positive, negative.

Step-by-step explanation:

For "normal" cash flows (the outflows occur before the inflows), the Net Present Value (NPV) is positive if the discount rate is less than the Internal Rate of Return (IRR), and it is negative if the discount rate is greater than the IRR. Therefore, the correct answer to the student's question is: a) Positive, negative. This is because the NPV measures the difference between the present value of cash inflows and the present value of cash outflows over a period of time. When the discount rate is less than the IRR, the present value of future cash inflows is greater than the initial investment, hence the NPV is positive. Conversely, if the discount rate is higher than the IRR, the present value of inflows is less than the investment outflows, leading to a negative NPV.