Question

Ron Jasper manages a factory for Frombees Inc. A salesperson for new factory equipment has persuaded Ron that the new equipment offered by her company would be less dangerous for the employees and lower the sound level in the factory significantly. Ron believes that employees would be more satisfied with their jobs as a result of reduced danger and lower sound levels. Ron has always said that satisfied employees are more productive. Thus, in making the cash flow estimates for the new equipment, Ron has included increased cash flows from increased productivity. In fact, these estimated increases in productivity are just enough to allow the net present value of the proposal to be positive. Identify whether the following statement is true or false: The net present value estimates could be optimistic.
a. True
b. False

Answer 1

Answer: True

Explanation:

Net Present Value (NPV) is the addition of the present values of the inflows and outflows of cash. According to the net present value, investments that has a net present value which is greater than zero is worthwhile and should increase a company's earning.

In this case, the purchase of the new equipment that lowers sound level in the factory will lead to employee satisfaction and increased productivity which will in turn lead to high NPV.