Chapter 8, Problem 1CC

Summary Introduction

Net Present Value: Net present value refers the variance between a present value of cash flows and the present value of cash outflows.

To Explain: The decision rule and the relation of this rule with the valuation.

Answer to Problem 1CC

NPV decision rule: decision rule signifies the decision related to investment in the project.

The value of is greater than 0 then the project should be considered for the acceptance, otherwise, the project is rejected.

• refers the value of all cash outflows and inflows at present that helps to take the decision to accept or reject a particular project.
• The decision rule is related to the valuation principle as helps to analyze the value of cash at present and the wealth of the project.
• It determines whether the project will increase the wealth or not.
• From the decision rule, the investor got to know whether the investment should be made or not.

Explanation of Solution

• The of any project can be positive or negative.
• If the value is positive than the investor should invest in that particular project.
• If the value is negative than the investor should not invest in that particular project.
• decision rule helps to identify the higher if the investor needs to choose the better option among the various,

Conclusion

decision rule helps to choose the better options of investments. Hence, the decision rule is related to the valuation principle.