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What does an NPV of zero really mean?

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1) What does an NPV exactly equal to zero really mean?
a) Discuss. Would a firm undertake an investment with an NPV of zero? Why?
b) How can firms position new ventures to have NPVs of greater than zero? What are some strategies for that?

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Solution Summary

An explanation in everyday language especially for novices that don't like or appreciate all the buzz words. Discussion is 185 because it is clear -- no need to go on and on.

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1. NPV means that the present value of the savings or profits expected from the venture is greater than the initial investment. The NPV is sensitive to the discount rate used to establish the present value.

a. Firms that undertake a project with a zero NPV may wish to gain ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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