Final answer:
The correct answer is that the NPV of a project with both positive and negative cash flows depends on the discount rate. NPV calculations consider the time value of money, discounting future cash flows back to their present value. This is not a fixed value but changes with different discount rates and future cash flows.
Step-by-step explanation:
When assessing a project that features both positive and negative cash flows after the first cash flow, it is important to identify a true statement about the Net Present Value (NPV) of the project. The correct answer to the provided options is c) Its NPV depends on the discount rate. NPV is a valuation method used to determine the value of an investment today, based on projections of how much money it will generate in the future. The future cash flows are discounted back to the present value using a discount rate, which reflects the project's cost of capital and the risk associated with the future cash flows.
Given that NPV relies on the discount rate, it means that NPV will change as the discount rate changes. If the present value of the cash inflows exceeds the present value of the cash outflows, the NPV is positive, which is desirable. Conversely, if the present value of the outflows exceeds the inflows, the NPV is negative, indicating that the investment may not be worthwhile. This relationship is neither always positive nor always negative and is certainly not unrelated to the discount rate. Therefore, NPV is sensitive to the discount rate and understanding this relationship is key when evaluating investment opportunities.
The concept of NPV and its dependency on the discount rate is crucial because investors must decide what they are willing to pay now for future benefits. Discrepancies in NPV calculations can occur due to differences in the expected returns from an investment, such as potential capital gains or dividends, and the selected discount rate, showcasing the importance of these factors in investment decision-making processes.