A firm has a Net Present Value of zero, should the project be rejected?
(edited)
A firm has a Net Present Value of zero, should the project be rejected?
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Net Present Value
7 answers
Hi, in addition to the comments of other coaches I would like to suggest:
- an interesting article on the topic: https://www.preplounge.com/en/bootcamp.php/business-concept-library/common-terms-of-business/net-present-value-npv
- my last case in the platform about it: https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/caribbean-island-mbb-final-round-232
Hope it helps,
Antonello
Hi there,
We do need a some more context, but let me help clarify:
If the objective of the client is only to earn a profit, and there are better alternatives for spending the money, then the project should be rejected if NPV <0
If the client has other objectives (market share, competitive response, growth, disversification, etc.), then the answer becomes more complicated.
In general though, an NPV of 0 is "neutral". It's rare that you'll have a 0 NPV in a case, but it basically means that it technically meets our investment criteria.
(edited)
First of all, it's probably a project that has a NPV of 0, not a firm.
After that, you can develop a framework to think about this - this is a bit rudimentary, but you can expand it with more background of the case:
- Financial reasons
- Can they chose to do nothing or do they need to do this project or another one (so is in-action an option?)
- If no, then what is the NPV for the alternative?
- Non fincancial reasons
- Do they have any reasons to do the project even if it is NPV neutral (e.g. legal requirement)?
Hello,
I think it's hard to give you an answer without knowing more details and the context. Some questions to be answered would be:
- How many years did you consider for NPV calculation?
- Is it a startup or a mature firm?
- How is the trend and size of the revenues?
- What is the target of our client?
Feel free to text me if you want to discuss the problem in details.
Best,
Luca
Hello!
It depends totally on the client´s targets, which is the 1st thing that should be ALWAYS clarified
Cheers,
Clara
You need to provide a lot more details for this question to be answerable
Could you please provide some more context? GB
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