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Hi there,
I wanted to ask…in the case that NPV = 0 (cash inflows & outflows = breakeven) should we undertake the project or not? (assuming we have no other projects to choose from).
In theory they would be indifferent as to whether to accept or not.
However in practice they would reject the project because the NPV calculation is always based on estimates of future cash flows, which are always uncertain. It would only need the slightest error in the estimates for the NPV to end up being negative, and it would therefore be too big a risk to invest in the project.
The uncertainty is one of the reasons we look at the sensitivity (as I explain in my free lectures).
I don’t know whether or not you are watching the lectures, but they are a complete free course for FM and cover everything needed to be able to pass the exam well.
By far the most important book to have is a Revision Kit, because practice at past exam questions (and other exam-standard questions) is so vital to passing the exam.Thank you very much for your answer.
To be honest I was only going through the notes.
I will start watching the lectures as well, while covering the corresponding book chapters.Once again, thank you!
You are welcome 🙂
Do watch the lectures. If you are watching them then you do not really need the Study Texts although extra reading is always worthwhile if you have the time.
The problem with the Study Texts is partly that they are so long (because they have to make sure that every single thing in the syllabus is covered even though many topics never get asked or are just asked rarely for only 2 marks), and also because generally they are not written by tutors, and tutors are focussed on helping to make sure students pass the exam.
Our lectures are the same as lectures that you would receive on face-to-face courses. They never claim to always have covered 100% of everything in every single exam, but they certainly cover close to 100% and certainly more than enough to be able to pass with a high mark.
But do make sure you have the Revision Kit. The questions there are all past exam or exam standard, and are in the same format as in the real exam – that is not always the case for questions in the Study Text, which can make things confusing.
If you come across anything in the lectures (or when attempting questions in the Revision Kit) then ask in this forum and I will explain.
Sorry, I have one last question in regards to NPV = 0.
Assuming that in the Exam we were asked to choose between 2 mutually exclusive projects; Project A & Project B.
Project A has a negative NPV where as B’s NPV is 0.
If we were asked to choose between the two, as an answer could i give two perspectives to the examiner?
For example would this investment decision seem appropriate to the examiner?
“Since the Investor has to choose between the 2 projects, then Project B seems the best out of the two. However, approving Project B is highly risky, as the inflows are just estimates, and the actual NPV may appear to be negative (thus not financially viable). Therefore the investor should reject both projects”.
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