7. Now that you have finished FIN 8091 , you know there are things that we know

Question

7. Now that you have finished FIN 8091 , you know there are things that we know matter and things that we think matter and things that we know very little about . Adopting NPV>0 projects is in the set of the firm.

(a)Give a careful explanation as to why adopting NPV>0 projects is consistent with the goal of the firm

(b)We recognize that in competitive markets , most projects will have a NPV=0

(1)Give an explanation to an ECON104(basic microeconomics) student about why a firm would take on such projects and what they have to gain or lose

(2)Under what circumstances do we see NPV>0 projects?

Explanation / Answer

(a)Give a careful explanation as to why adopting NPV>0 projects is consistent with the goal of the firm

Answer: NPV>0 means that the value of the revenues is greater than the costs. When revenues are greater than costs, the investor makes a profit. If NPV> means investment is making money. Therefore, investor should make investment with positive NPV.

(b)We recognize that in competitive markets , most projects will have a NPV=0

(1)Give an explanation to an ECON104(basic microeconomics) student about why a firm would take on such projects and what they have to gain or lose

Answer: N=0 means there is no gain or loss. If NPV> means investment is making money. Therefore, investor should make investment with positive NPV.

(2)Under what circumstances do we see NPV>0 projects?

Answer: When inflows are mote than outflows, NPV>0.

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