Choosing production alternative

Question 1

NPV

Answer 1

The difference between the present value of cash inflows and outflows is called the net present value. The net present value determines whether or not the project is acceptable investment.

Question 2

Relevant cost

Answer 2

Only those costs and benefits that differ in total between alternatives are relevant in a decision. Costs that are never relevant is Sunk cost/historical cost as they are a cost that has already incurred.

Question 3

Minimize or maximize NPV

Answer 3

Whenever NPV is zero or greater it is a good idea to invest, so the higher the NPV the better your return is going to be.