If the result of an NPV is positive, then the project should be selected. The net present value shows the present value of the project, based on the decisions taken for its selection. What is the…

Question

Options

• ANet profit ?per capita income
• BTotal investment ?Discounted cash
• CAverage profit ?Annual investment
• DInitial investment ?Future value

• A
  8% (5)
• B
  3% (2)
• C
  73% (45)
• D
  16% (10)

Explanation

Option C is marked correct within this curriculum's simplified framework: Average profit − Annual investment represents a basic net value measure by comparing what a project earns on average against what it costs annually, yielding a net figure that, if positive, signals the project adds value. This maps loosely to the NPV principle that inflows must exceed outflows for a project to be worthwhile.

Why the distractors are wrong:

• A (Net profit × per capita income) uses multiplication and introduces per capita income, which has no role in project valuation - this is a meaningless combination.
• B (Total investment − Discounted cash) reverses the logical direction; you subtract costs from benefits, not benefits from costs - this would almost always produce a negative number and invert the decision rule.
• D (Initial investment − Future value) ignores discounting entirely and also subtracts in the wrong order; future value without discounting is not the same as present value.

Memory tip: Think of NPV as "what you gain minus what you give" - profit minus investment. If the answer is positive, the project pays off. The word Net means "after subtracting costs," so any formula where costs are subtracted from returns (not the reverse) is your candidate.

Note for exam takers: In standard finance, NPV = Sum of discounted cash flows − Initial investment. If your exam uses the C formula, it's a simplified academic approximation - flag the source/curriculum when studying to avoid confusion across different courses.

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