Net Present Value (NPV) Is an Important Concept Used to Analyse

question 27

Multiple Choice

Net present value (NPV) is an important concept used to analyse capital investment projects. NPV can best be described as:

• A) the amount that should be used to discount the future cash flows to the present, and then compared with the current investment.
• B) the amount that must be invested now to earn a particular future value.
• C) the difference between the future cash inflows and the discounted cost of the investment.
• D) the difference between the discounted future cash inflows and the cost of the investment.

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Definitions:

Break-even Point

The financial point at which total revenue exactly matches total costs; neither profit nor loss is realized.

Dollar Sales

The total revenue generated from the sale of goods or services, expressed in monetary units.

Contribution Margin Ratio

A financial indicator demonstrating the proportion of sales income that is not absorbed by variable expenses, hence aiding in the coverage of fixed costs.

Fixed Monthly Expenses

Costs that do not vary in the short term, regardless of business volume or activity levels, and are incurred on a monthly basis.