When Using the NPV Method for a Particular Investment Decision

question 11

Multiple Choice

When using the NPV method for a particular investment decision, if the present value of the cash inflows is equal to the present value of the cash outflows, then:

• A) the discount rate used was too high.
• B) the investment should not be made.
• C) the investment has an actual rate of return of zero percent.
• D) the discount rate is equal to the internal rate of return.

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Definitions:

Marginal Propensity to Consume

The fraction of any increase in disposable income spent on consumption, highlighting how consumption changes as income changes.

Price Level

Price level indicates the average of current prices across the entire spectrum of goods and services produced in the economy, often compared over time to assess inflation or deflation.

Aggregate Demand Curve

The total demand curve illustrates the overall volume of goods and services the economy requires at various price points.

Investment Demand Curve

A graph showing the relationship between the rate of interest and the total amount of investment demanded by all sectors in the economy.