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While assessing rate of return on certain investments, the investor assumes certain interest rate and calculates his net present value of all his cash inflows and outflows. Which of following will be correct?

While assessing rate of return on certain investments, the investor assumes certain interest rate and calculates his net present value of all his cash inflows and outflows. Which of following will be correct? Correct Answer If net present value is positive for the assumed value of interest rate, the actual rate of return will be higher than assumed interest rate

Explanation:

Net present value:

  • The NPV is a metric that can determine whether or not an investment opportunity is a smart financial decision.
  • NPV is the present value (PV) of all the cash flows (with inflows being positive cash flows and outflows being negative), which means that the NPV can be considered a formula for revenues minus costs. NPV = Present Value Of Cash Inflow - Present Value Of Cash Outflow.
  • If NPV is positive, that means that the value of the revenues (cash inflows) is greater than the costs (cash outflows). When revenues are greater than costs, the investor makes a profit. The opposite is true when the NPV is negative. When the NPV is 0, there is no gain or loss.
  • Positive NPV in a project appraised by a firm occurs mostly on account of tangible benefits. Tangible factors like economies of scale, marketing reachability, and product differentiation result in a positive NPV because of a higher contribution to cash inflow.
  • In contrast to tangible benefits, intangible benefits (also called soft benefits) are the gains attributable to your improvement project that are not reportable for formal accounting purposes.
  • These benefits are not included in the financial calculations because they are non-monetary or subjective or difficult to measure, even though they may significantly impact business.
  • For example, non-reportable benefits such as increased level in service (in ways that cannot be measured), employee satisfaction, and customer satisfaction.

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