Business Degree Certification Practice Test

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What does a net present value (NPV) of zero mean for a project?

The project has a zero percent rate of return
The project requires no cash investment
The project's cash inflows equal its cash outflows in current dollar terms
The summation of all cash flows is zero

The correct answer is: The project's cash inflows equal its cash outflows in current dollar terms

A net present value (NPV) of zero indicates that the project's cash inflows are exactly equal to its cash outflows when analyzed in today's dollar terms. This means that the total value generated by the project, when discounted back to the present value, matches the initial investment and any additional costs incurred. As a result, the project neither creates nor destroys value; it merely recoups the costs over time without additional financial benefit or loss. This scenario is crucial in investment analysis, as it shows that the project is breaking even. It suggests that the expected rate of return on the project is equal to the discount rate used in the NPV calculation. Thus, while the project may not generate additional profits, it also does not incur losses, making it a critical point for decision-making in project evaluation.