Calculating Capital Gain and Net Cash Flows

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What does the net present value (NPV) measure?

The total cash inflows of an investment
The initial capital invested in a project
The current value of future cash flows (correct)
The rate of return on an investment

If a project has a negative NPV, what does this indicate?

The project is profitable
The project has low risk
The project is not profitable (correct)
The project has high returns

What is the purpose of determining the internal rate of return (IRR) for a project?

To estimate the return of potential investments (correct)
To determine the current value of future cash flows
To calculate the net present value (NPV)
To identify the total costs of a project

For which type of project should the internal rate of return be lower than the discount rate (WACC)?

Projects that should be abandoned (B) Signup and view all the answers

How does the net present value (NPV) relate to the decision between two projects?

The project with the highest NPV is preferred (A) Signup and view all the answers

What does it mean if the NPV of a project is zero?

The project breaks even (C) Signup and view all the answers

How does the weighted average cost of capital (WACC) affect a project's net present value (NPV)?

Low WACC leads to lower NPV (B) Signup and view all the answers

In which scenario would a company prefer a project with a negative NPV?

When long-term benefits are more important than short-term gains (A) Signup and view all the answers

What will happen if the internal rate of return (IRR) of a project is higher than the discount rate (WACC)?

The project will be considered favorable for investment (C) Signup and view all the answers

What is the significance of the discount rate in net present value analysis?

It reflects the time value of money (A) Signup and view all the answers

What is the formula for calculating Net Present Value (NPV)?

NPV = Sum of discounted cash flows - Capital invested Signup and view all the answers

When is a project considered profitable based on its NPV value?

A project is profitable when the NPV is positive. Signup and view all the answers

Define the Internal Rate of Return (IRR) and its significance.

IRR is the discount rate for which the NPV is zero, it estimates the return of potential investments. Signup and view all the answers

What is the condition for deciding to abandon a project based on its IRR?

Any project with an IRR lower than the discount rate (WACC) should be abandoned. Signup and view all the answers

Explain why the project with the highest NPV is preferred between two projects.

The project with the highest NPV maximizes the company's cash flow. Signup and view all the answers

What does a negative NPV indicate about a project?

If the NPV is negative, it means that the project costs more than it brings in. Signup and view all the answers

How does the formula for IRR help in making investment decisions?

The IRR formula equates the sum of cash flows discounted at the IRR to the capital invested. Signup and view all the answers

Explain the relationship between the discount rate (WACC) and the IRR of a project.

If the IRR is higher than the discount rate (WACC), the project is considered attractive. Signup and view all the answers

How does the weighted average cost of capital (WACC) impact a project's NPV?

If the IRR is lower than the WACC, the NPV would be negative. Signup and view all the answers

What happens when the NPV of a project is zero?

If the NPV is zero, the project breaks even, and it neither costs more nor brings in any additional value. Signup and view all the answers