The net present value is found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the project's internal rate of return.
True or false?

1 answer

Question:

The net present value is found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the project's internal rate of return.
True or false?

Answer: FalseExplanation: The net present value is not found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the project's internal rate of return. The net present value (NPV) is defined as the difference between the present value of cash inflows and that of cash outflows over a period of time which is employed in determining whether an expansion opportunity or investment is worth it (a process known as capital budgeting). The NPV is found by estimating future cash flows of a project which is then discounted into present value amounts by using a discount rate that represents the project's cost of capital and its risk. Every project's future positive cash flows are then reduced into a present value number which when subtracted from the initial cash outlay required for the project gives the net present value of the project or investment.

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