Question

If an investment is producing a return that is equal to the required return, the investment's net present value will be?

1) positive
2) greater than the project's initial investment
3) zero
4) equal to the project's net profit
5) less than, or equal to, zero

Answer 1

If an investment is producing a return that is equal to the required return, the investment's net present value will be zero.

Step-by-step explanation:

If an investment is producing a return that is equal to the required return, the investment's net present value will be zero.

The Net Present Value (NPV) is a financial indicator used to assess the profitability of an investment. It measures the difference between the present value of expected cash inflows and the present value of expected cash outflows. When an investment produces a return that is equal to the required return, it means that the project is generating just enough profit to cover the initial investment and meet the required rate of return.

For example, if an investment has an initial cost of $10,000 and is expected to generate annual cash flows of $1,000 for 10 years, with a required rate of return of 10%, the NPV can be calculated as follows:

NPV = PV of Cash Inflows - PV of Initial Investment

NPV = ($1,000 / (1+0.10)^1) + ($1,000 / (1+0.10)^2) + ... + ($1,000 / (1+0.10)^10) - $10,000

If the resulting NPV is zero, it means that the present value of the cash inflows is equal to the initial investment, indicating that the investment is producing a return that is equal to the required return.