The net present value $($NPV$)$ rule is considered one of the most common and preferred criteria that generally lead to good investment decisions.

Consider this case:

Suppose Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project $($project Alpha$)$ that will require an initial investment of $$450,000.$ The project is expected to generate the following net cash flows:

Year

Cash Flow

Year $1$ $$350,000$

Year $2$ $$400,000$

Year $3$ $$475,000$

Year $4$ $$475,000$

Pheasant Pharmaceuticals$$s weighted average cost of capital is $9\%,$ and project Alpha has the same risk as the firm$$s average project. Based on the cash flows, what is project Alpha$$s net present value $($NPV$)?$

$$1,261,062$

$$1,311,062$

$$911,062$

$$1,386,062$

Making the accept or reject decision

Pheasant Pharmaceuticals$$s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should $\_\_\_\_\_\_\_\_$ project Alpha.

Which of the following statements best explains what it means when a project has an NPV of $$0?$

When a project has an NPV of $$0,$ the project is earning a profit of $$0.$ A firm should reject any project with an NPV of $$0,$ because the project is not profitable.

When a project has an NPV of $$0,$ the project is earning a rate of return less than the project$$s weighted average cost of capital. It$$s OK to accept the project, as long as the project$$s profit is positive.

When a project has an NPV of $$0,$ the project is earning a rate of return equal to the project$$s weighted average cost of capital. It$$s OK to accept a project with an NPV of $$0,$ because the project is earning the required minimum rate of return.