Question

In using the net present value approach to evaluating credit policy alternatives, all other things equal: The alternative with the lowest NPV should be selected The alternative with the present value of cash inflows closest to zero should be selected The alternative with the highest NPV should be selected The alternative with the NPV closest to zero should be selected

Answer 1

NPV or the net present value method is a famous method to evaluate alternatives by determining the the current value of the alternatives.

NPV is the current (present) value of all the future cashflows (in the lifecycle of the project) discounted to the present. So, if we discount all future cashflow and find their present value and sum them, we get the NPV.

The rule of NPV says that the alternative with the highest NPV is the one that should be choosen.

Hence,

all thing equal,

The alternative with the highest NPV should be selected (Option 3)

Answer 2

NPV or the net present value method is a famous method to evaluate alternatives by determining the the current value of the alternatives.

NPV is the current (present) value of all the future cashflows (in the lifecycle of the project) discounted to the present. So, if we discount all future cashflow and find their present value and sum them, we get the NPV.

NPV = -Σ Rt /(1+i) , t varies from 1 ton where R+ = Cash flow netted (Inflow - Outflow) during the period "t" i = Discount rate t = number of periods

The rule of NPV says that the alternative with the highest NPV is the one that should be choosen.

Hence,

all thing equal,

The alternative with the highest NPV should be selected (Option 3)