the cost of capital measurement helps determine the value of

the cost of capital measurement helps determine the value of a capital investment, but a positive NPV investment should not be rejected if it returns less than its cost of capital as long as it returns a positive net value.

True or False

Solution

Net Present Value ( NPV) indicates present value of all investments ( outflow ) and cash inflows after discounting them with appropriate discounting rate. A positive cash flow i.e. a positive NPV is must for a project to qualify for investment. Thus it is “Necessary” condition , but not “Sufficient” condition for investment.)

However the positive cash flow generated must be sufficient enough to cover cost of Equity as well as cost of debt ( in terms of interest payable. The weighted average of cost of equity and cost of debt is called Cost of Capital. Thus it is must that the amount of cash generated through a positive NPV must be sufficient enough to cover cost of capital of the project , otherwise the project will be unviable in the long run.

Therefore it is FALSE to state that a “Positive NPV investment should not be rejected if it returns less than its cost of capital as long as it returns a positive net value.

ANSWER : FALSE