Question 21

The costs exceed the benefits by $10,000 and should be rejected.

A negative net present value (NPV) of $10,000 indicates that the projected costs of the investment outweigh the expected benefits by that amount, suggesting that the investment opportunity should not be pursued.

A) Failing to accept the project will cost the firm $10,000.

This option is incorrect because a negative NPV does not imply that failing to accept the project incurs a cost. Instead, it suggests that accepting the project would result in a loss of $10,000, indicating that the project's financial returns are insufficient to cover its costs.

B) The costs exceed the benefits by $10,000 and should be rejected.

This option is correct. A negative NPV signifies that the total costs associated with the investment are greater than the total expected benefits, by $10,000. Therefore, it is advisable to reject the project, as it would lead to a financial loss for the firm.

C) The benefits exceed the costs by $10,000, making it a good opportunity.

This option is incorrect because a negative NPV clearly indicates that the benefits do not exceed the costs. In fact, it highlights that the investment would result in a net loss rather than a gain.

D) It will generate $10,000 in profits and should be accepted.

This option is incorrect. A negative NPV of $10,000 signifies a projected loss rather than a profit. Accepting the project would not generate profits; rather, it would result in a loss of that amount.

Conclusion

The correct answer, B, is definitively right because it accurately reflects the implications of a negative NPV, indicating that the costs of the project exceed its benefits. All other options misinterpret the significance of the negative NPV, failing to recognize that pursuing the investment would lead to a financial detriment for the company.