Question

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be

Group of answer choices

accepted because the internal rate of return is positive

accepted because the profitability index is less than 1.

accepted because the profitability index is negative.

accepted because IRR is higher than the discount rate.

rejected because the net present value is negative

Answer 1

Discount rate is rate use to calculate the present value of expected cash flows from the project.It is the minimum rate that investor/firm expects to earn from the project.IRR is the rate at which present value of expected cash flows of the project is equal to the initial cost of the project.In other term,IRR is the rate at which NPV of the project is equal to zero.We know that higher the discount rate,lower the NPV.

Accordingly,When the present value of the cash inflows exceeds the initial cost of a project, then the project should be accepted because IRR is higher than the discount rate.

Thus the correct answer is 'accepted because IRR is higher than the discount rate'.