Certified Forester Practice Exam

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What does a positive NPV indicate about a project?

The project will definitely be profitable
It is expected to add value to the firm
It will result in instant financial gain
It requires no further investment

The correct answer is: It is expected to add value to the firm

A positive Net Present Value (NPV) indicates that a project is expected to add value to the firm. This arises from calculating the present value of expected cash inflows and subtracting the present value of cash outflows associated with the project. When the NPV is greater than zero, it shows that the anticipated revenues exceed the costs after accounting for the time value of money, thereby contributing positively to the overall financial health and value of the firm. This does not guarantee that the project will definitely be profitable, as profitability can be influenced by numerous unforeseen factors. Additionally, a positive NPV does not mean that the project will result in instant financial gain; rather, it merely indicates that future cash inflows are anticipated to surpass initial and ongoing costs over time. Lastly, having a positive NPV does not imply that no further investment is required; rather, it suggests that the investment made is expected to yield a return that exceeds the cost.