A project has a net present value of zero. Which one of the following best describes this project?

Date:

a. The project has a zero percent rate of return.

b. The project requires no initial cash investment.

c. The project has no cash flows.

d. The summation of all of the project’s cash flows is zero.

e. The project’s cash inflows equal its cash outflows in current dollar terms.

Answer: – The correct answer is (d) The summation of all of the project’s cash flows is zero.

Explanation:

Net present value (NPV) is the present value of a project’s cash inflows minus the present value of its cash outflows. A NPV of zero indicates that the present value of the project’s cash inflows is equal to the present value of its cash outflows. In other words, the project’s total cash inflows are exactly offset by its total cash outflows. Therefore, the summation of all of the project’s cash flows is zero.

Option (a) is not necessarily true as the rate of return could be positive, negative, or zero depending on the cash flows of the project.

Option (b) is not necessarily true as the project may still require an initial cash investment, but the present value of the cash inflows is equal to the present value of the cash outflows.

Option (c) is not necessarily true as the project can have cash flows, but the present value of the cash inflows is equal to the present value of the cash outflows.

Option (e) is not necessarily true as the project’s cash inflows and outflows may not be equal in current dollar terms, but they are equal in terms of their present value.

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