The net present value: I. is highly dependent upon the discount rate applied to an investment. II. increases as the discount rate applied to an investment increases. III. is a measure of the value created by undertaking an investment. IV. is always greater than zero. Group of answer choices I and III only II and IV only II, III, and IV only I, III, and IV only I, II, and IV only
Question
The net present value:
I. is highly dependent upon the discount rate applied to an investment. II. increases as the discount rate applied to an investment increases. III. is a measure of the value created by undertaking an investment. IV. is always greater than zero.
Group of answer choices
I and III only
II and IV only
II, III, and IV only
I, III, and IV only
I, II, and IV only
Solution
The correct group of answer choices is "I and III only".
Explanation:
I. is highly dependent upon the discount rate applied to an investment. - This is true. The net present value (NPV) is calculated by discounting the expected future cash flows of an investment, so it is highly dependent on the discount rate used.
II. increases as the discount rate applied to an investment increases. - This is false. The NPV actually decreases as the discount rate increases. This is because the higher the discount rate, the less value future cash flows have in today's dollars.
III. is a measure of the value created by undertaking an investment. - This is true. The NPV measures the value that an investment is expected to generate in today's dollars, taking into account the time value of money.
IV. is always greater than zero. - This is false. The NPV can be negative, zero, or positive. A negative NPV indicates that the investment is expected to lose money, a zero NPV indicates that the investment is expected to break even, and a positive NPV indicates that the investment is expected to generate a profit.
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