A project requires an initial investment of 0 and yields 150,000 in year 1. The discount rate is 0%. What is the NPV?

A project requires an initial investment of 0 and yields 150,000 in year 1. The discount rate is 0%. What is the NPV?

• A. 100000
• B. 150000
• C. 0
• D. -150000

Answer: (C)

With a zero discount rate, the present value of a future cash flow is just the cash flow amount itself. NPV equals the sum of present values of all inflows minus the initial investment. Here, the only inflow is 150,000 in year 1, so its present value is 150,000. The initial investment is 0, so NPV = 150,000 − 0 = 150,000. So the NPV is 150,000. If the discount rate were positive, that inflow would be discounted to less than 150,000, lowering the NPV accordingly.

With a zero discount rate, the present value of a future cash flow is just the cash flow amount itself. NPV equals the sum of present values of all inflows minus the initial investment.

Here, the only inflow is 150,000 in year 1, so its present value is 150,000. The initial investment is 0, so NPV = 150,000 − 0 = 150,000.

So the NPV is 150,000. If the discount rate were positive, that inflow would be discounted to less than 150,000, lowering the NPV accordingly.