Question

An analysis of a proposal by the net present value method indicated that the present value of future cash inflows exceeded the amount to be invested. Which of the following statements best describes the results of this analysis? a. The proposal is undesirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis. b. The proposal is desirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis. c. The proposal is undesirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. d. The proposal is desirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis.

Answer 1

Answer:

b. The proposal is desirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis.

Explanation:

Under the Net Present Value method we compute the present value of all cash flows, inflow or outflow

And these values are discounted at the minimum rate of return required if the resulting value is positive that means that the rate of return expected is less than minimum rate of return used to discount the value. In that case we are sure that the result of this project will be positive and favorable.

As the discount rate used is in, fact is higher than the actual rate of expected return, therefore this assures to return a profit.

Final Answer

b. The proposal is desirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis.