BB2

In what way is the NPV consistent with the principle of shareholder wealth maximization? What happens to the value of a firm if a positive-NPV project is accepted? If a negative-NPV project is accepted?

A8-7.   The NPV approach is consistent with shareholder maximization because it suggests that firms should only accept projects which earn returns above the opportunity costs of the firm’s investors. The NPV in effect measures the dollar contribution that the given project is expected to make to the firm’s overall value. If a firm invests in a project with NPV > $0, then the share price will rise. Conversely, a firm’s share price will fall if it invests in projects with NPV < $0.