Practice Question
If a project has a discounted payback period within the acceptable time, and it has conventional cash flows, which of the following is most accurate?
A) It cannot have a negative NPV
B) It must be the best alternative available
C) It can't possibly fail
D) It could still have a negative NPV
E) Choices A and C are correct
The discounted payback period is the time it takes for the present value of a project's cash inflows to equal its initial investment. Unlike the regular payback method, it takes the time value of money into account.
If the present value of cash inflows covers the initial investment within the acceptable period, the project will at least break even in NPV terms by that point. Any additional discounted inflows after this point will only add to the value, making the NPV positive.
With conventional cash flows (initial outflow followed by inflows), achieving a discounted payback period means the NPV cannot be negative.
A project that meets the discounted payback period requirement and has conventional cash flows will always have a non-negative NPV. Therefore, the correct answer is: A) It cannot have a negative NPV.