Chapter 8, Problem 8.1C

Summary Introduction

To discuss: The basic investment rule of NPV.

Introduction:

The net present value is the difference between the market value of an investment and the cost of the investment.

Explanation of Solution

The basic rules of net present value are as follows:

• If the computed net present value is positive, then the investment must be accepted.
• If the computed net present value is negative, then the investment must be rejected.

Pictorial representation:

The rule of net present value is shown in the diagram below:

Conclusion

The computation of net present value is used to assess the investment, which in turn, is utilized to identify the profitability in a proposed investment.