Indifference when Net present value i.e NPV = 0

Many textbooks and websites say when NPV = 0, the company will be indifferent to investment.

But I believe that when NPV = 0, the decision should be to go ahead with investment as , the company is able to earn a return that is exactly equal to required rate of return. When a company is able to gets its required rate of return should not it go ahead with investment rather than staying indifferent ?

Please provide detailed clarification on this. Thanks.

You can borrow money at 8% so that you can earn an 8% return on that money.

Why would you do that?

Note that NPV tells you the value that you’re adding to the company. Why work hard to add zero value when you can do nothing and add zero value?

Thanks for your reply.

A company exists to meet the common shareholder’s expectation.

If common shareholder invests money in a company, to earn a certain a return on their investment , say 8% , the company should do it simply for the reason that common shareholders are the owners of the company and owners want / require 8%. Can the company say to common shareholders , you will get 8%, but what is in it for me?

Another argument could be this … if NPV=0, it means the company is able to provide salary to all its employees working on the project and also satisfy investors.

So, the company should go ahead with project when NPV = 0.

I appreciate your views.

You’re assuming that the company can do the project with its existing financing and existing workforce and capital equipment. Those are not the general assumptions.

The general assumptions are that to do this project the company will need to expand: more financing, more capital investment, more workers.

If the company needs work to do to employ existing capital and labor, that’s a question that is not answered merely by a project’s NPV.

Thanks again for the reply. Your inputs are valuable.

This assumption that NPV should NOT be used as a tool for evaluation if the financing is going to come from existing funds is strangely missing in many textbooks. Please let me know if you have any links to reliable websites that says so.

If the common shareholders are willing to invest IN FUTURE and tell the company that they will be very happy with, say 8% return, and the project NPV yields 8% for the FUTURE PROJECT, should not the company go ahead with the project ? or should the company tell its common shareholders …with 8% you will be very happy but what is in it for the company?