Question

If a project has a Net Present Value of exactly zero, what does this tell you about the project&#x27;s ability to meet your required rate of return?

Accepted Answer

When a project has a Net Present Value (NPV) of exactly zero, it means the project earns exactly the amount of money you need it to earn. The NPV is a calculation that turns all the future cash a project will make into today&#x27;s dollars to see if it beats your required rate of return, which is the minimum profit percentage you demand for taking a risk. If the NPV is zero, the project&#x27;s profit perfectly matches that required rate of return. It is like taking a loan where the interest you pay is exactly equal to the interest you earn on the money you invested; you end up neither richer nor poorer than you started. The project is not a failure because it meets your expectations, but it does not provide any extra profit or "cushion" beyond what you asked for. In this case, the project&#x27;s own internal profit rate, often called the Internal Rate of Return, is exactly equal to your required rate of return.

If a project has a Net Present Value of exactly zero, what does this tell you about the project's ability to meet your required rate of return?

When a project has a Net Present Value (NPV) of exactly zero, it means the project earns exactly the amount of money you need it to earn. The NPV is a calculation that turns all the future cash a project will make into today's dollars to see if it beats your required rate....

Community Answers

Home → All Courses → Engineering and Technology Courses → Capital Allocation & Infrastructure Financing → Flashcard

If a project has a Net Present Value of exactly zero, what does this tell you about the project's ability to meet your required rate of return?

When a project has a Net Present Value (NPV) of exactly zero, it means the project earns exactly the amount of money you need it to earn. The NPV is a calculation that turns all the future cash a project will make into today's dollars to see if it beats your required rate....

Community Answers