Net Present Value Quiz

Why is the time value of money important in investment appraisal?

• It recognizes that money available today is worth more than the same amount in the future.

• It ensures that all investments are profitable.

• It allows businesses to ignore inflation.

• It helps in understanding the future value of money.

What role do discount factors play in NPV calculations?

• They are used to calculate the interest rate.

• They increase the future value of cash flows.

• They help in determining the present value of future cash flows.

• They are irrelevant to NPV calculations.

In the window cleaning business example, what was the NPV of the investment?

• £0

• £-5,500

• £80,000

• £5,500

Which project had a positive NPV in the restaurant business example?

• Project Pasta

• Project Pizza

• Both projects

• Neither project

What is one advantage of using NPV in investment decisions?

• It ignores the time value of money.

• It does not require any assumptions.

• It provides a single value for easy comparison of projects.

• It guarantees a profitable investment.

What is a limitation of the NPV method?

• It considers all cash flows throughout the project's life.

• It requires accurate estimation of future cash flows.

• It allows for sensitivity analysis.

• It provides a comprehensive evaluation of the investment.

How does NPV enable sensitivity analysis?

• By eliminating the need for discount rates.

• By providing a fixed value for all projects.

• By assessing the impact of changes in cash flow projections.

• By ignoring changes in discount rates.

What happens if the discount rate is incorrectly chosen in NPV calculations?

• It can lead to flawed investment decisions.

• It has no impact on the NPV.

• It simplifies the calculation process.

• It guarantees a higher NPV.

Why might NPV not consider the size or scale of investments?

• Because it focuses only on cash inflows.

• Because it provides a single value for comparison.

• Because it does not account for project magnitude.

• Because it is a complex calculation.

What is the primary purpose of using NPV in business?

• To calculate the future value of money.

• To assess the profitability of an investment by comparing present and future cash flows.

• To eliminate the need for financial analysis.

• To ensure all projects are equally profitable.