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Basic Question 12 of 29
When you set NPV equal to zero in calculating a bid price, you are ______
B. appropriately including opportunity costs in your analysis.
C. certain to be the lowest bidder, since if any firm bids lower, they will be bidding based on taking a negative NPV project (which they shouldn't do).
D. assured of earning your firm's highest possible IRR.
E. finding the price at which you expect to create zero wealth for your stockholders.
A. going to earn net income of zero on the project.
B. appropriately including opportunity costs in your analysis.
C. certain to be the lowest bidder, since if any firm bids lower, they will be bidding based on taking a negative NPV project (which they shouldn't do).
D. assured of earning your firm's highest possible IRR.
E. finding the price at which you expect to create zero wealth for your stockholders.
User Contributed Comments 9
| User | Comment |
|---|---|
| kamal3rl2 | The project will create wealth but at the same rate as the discount rate so 0 net wealth will be created. |
| danlan | Why not B? |
| sarath | NPV of zero means no increase in wealth of shareholders... |
| Bibhu | The choice B is wrong due to the word "Appropriately". Though analysis include opportunity costs, but is not the correct way to include that in bid price.So B is wrong. C is wrong, because you cant be sure whether its the lowest bid. Others can apply with negative NPV as well. So E seems to be only option. Tricky question |
| xcye | C is wrong because other firms might have lower WACC |
| antihead | add C): I think they'd actually bid higher (higher investment, same CFs --> negative NPV) if they are going to receive a negative NPV - that's why C is wrong in my humble opinion. |
| moneyguy | It seems like a way to find a starting point in submitting an appropriate bid. |
| johntan1979 | Nope, Bibhu, nobody in the right business mind will take on a negative NPV project. The correct reason why C is wrong is given by xcye. |
| jonan203 | NPV or IRR do not quantify your opportunity cost, unless you compare it to the NPV and IRR of another project if the question asked you to compare the bids of two distinct projects you will see on a NPV and IRR basis what you are giving up by selecting one project over another. |
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Learning Outcome Statements
describe the capital allocation process, calculate net present value (NPV), internal rate of return (IRR), and return on invested capital (ROIC), and contrast their use in capital allocation
CFA® 2024 Level I Curriculum, Volume 2, Module 5.