Question

I don't understand the part whether to ACCEPT or REJECT a project please explain.

Do I always have to reject a project when NPV is NEGATIVE? Kindly explain base on the attached photo here or if there's simplest way for me to understand.

How do I know a benchmark of this given questions?

I know how to calculate them so I've done the workings already. I just need explanation Why must reject and accept.

thank you

/0000.00 10 % asoo, 00-Investment-2500.00 Ce 9750.001 Z. ThaINpy:-7-18.15 Accept the pro lect? Yes- No 21-10% ury 5% 36 . 3 b -3057. gs- 7513, 15 : 24203 . 36287-25 00 ク 1000 ormulo us aMotion ntal nvestment Inytla invetmant

Answer 1

When we evaluate project based on NPV we will be provided with the required rate of return (in your case its 10%). Required rate is minimum rate which share holder of investor expect from the project as they are taking risk they need some return which is this required rate. At required rate we arrive at present value of the project which you have already done..

We subtract present value of cash flow with present value of cash outflow (initial investment) to compute NPV. If project provide NPV = 0 this means that project is able to recover the cash flow at required rate of return and project should be accepted.

If NPV >0 this means that project is able to recover the cash flow more than required rate of return and project should be accepted.

If NPV < 0 this means that project is not able to recover the required rate of return and therefore should not be accepted.

Let me know if you still need any clarification..