Question

If project sales exceed the accounting break-even point, but the project has a negative EVA, then the project has a:

a. negative NPV but earns more than the discount rate.
b. positive NPV but earns less than the discount rate.
c. net loss on the income statement.
d. net profit but negative NPV.

Answer 1

d. net profit but negative NPV.

Step-by-step explanation:

If sales exceed the break even point (BEP) means the total revenue is more than total cost. But when we include in the consideration the cost of capital (WACC) and compare with the internal rate of return (IRR) the project is no attractive. In other words, if we discount the net cash flow at the WACC rate, the NPV (net present value) is negative.