A project is worthwhile or profitable if its Net Present Value (NPV) is:

Question

Accepted Answer

The correct option is 2:

Net Present Value (NPV) is a primary capital budgeting technique that determines a project's profitability by discounting all expected future cash flows back to their present value and subtracting the initial investment. A project is considered worthwhile, profitable, or value-adding if its NPV is **greater than 0 (positive)**. This positive value signifies that the project's cash inflows, after being discounted by the firm's required rate of return (or cost of capital), are greater than the initial cost of the project. In essence, a positive NPV means the project is expected to recover its initial cost, cover the required rate of return, and still generate a surplus value, thereby increasing the wealth of the company's shareholders. This adheres to the goal of financial management: wealth maximization.

The incorrect option is 1:
If a project's Net Present Value is **less than 0 (negative)**, it indicates that the discounted present value of the expected cash inflows is not sufficient to cover the initial investment. This outcome means the project's expected rate of return is actually *less* than the firm's cost of capital. Accepting a project with a negative NPV would ultimately destroy shareholder wealth, as the company is investing resources for a return lower than what its investors require. Therefore, an NPV less than zero signals a financially unsound project that should be rejected.

The incorrect option is 3:
A Net Present Value that is **equal to 0** implies that the present value of the project's expected cash inflows is exactly equal to the initial investment. This means the project is expected to earn a rate of return precisely equal to the required rate of return (cost of capital). While such a project is generally acceptable because it covers its financial costs, it does not add any *excess* value to the firm's wealth. The project is effectively a break-even investment in terms of wealth creation, and is not necessarily deemed "profitable" in the value-maximization sense, making "greater than 0" the better description of a profitable endeavor.

The incorrect option is 4:
The NPV decision rule is based on the sign of the value, not whether the value is **greater than 1**. The magnitude of the NPV value is an absolute measure of the expected increase in wealth. For example, a project with an NPV of 0.5 (which is less than 1) is still highly worthwhile because it is greater than zero and adds $0.50 of value per $1 of investment (or whatever the initial scale dictates), meaning it is profitable. The criterion "greater than 1" is arbitrary and misrepresents the foundational principle of the NPV rule, which is based on recovering all costs and earning a required return.