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21. What should a company do if the net present value (NPV) of an investment in...

21. What should a company do if the net present value (NPV) of an investment in a labor-saving machine is negative?

A. Buy the machine
B.

Don’t buy the machine


22. IRR = Internal Rate of Return. Under which of the following circumstances would a company decide to buy the machine being considered?

A. Buy the machine, if the IRR is greater than zero

B. Buy the machine, if the IRR is greater than the NPV (net present value)

C. Buy the machine, if the IRR is less than our cost of capital

D. Buy the machine, if the IRR is greater than our cost of capital
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Answer #1

21) Any project whose NPV is negative should not be accepted as its present value of cashinflows donot recover its initial investment and such an investment is not worth while. The money invested in the project can be diverted to any other project where it yields profitable returns.
So, answer is B: Dont buy the machine.

22) Internal rate of return is the rate at which the present value of cash inflows is equal to the initial investment.
So, if the cost of capital of the company is less than the IRR, then the investment is worth while.
If the cost of capital is more than IRR the machine is not advisable to be purchased as it results in negative return.
So, the answer is Option D: If the IRR is greater than cost of capital, the machine can be purchased

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