Question

# Suppose a project has conventional cash flows and a positive net present value. What do you...

Suppose a project has conventional cash flows and a positive net present value. What do you know about its payback? Its profitability index? Its IRR? Explain.

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From the given case If we have a project with a positive NPV for a given rate, then it will also have a positive NPV for a zero discount rate. Therefore, the payback period must be less than the project life. Also the discounted payback is calculated with the same rate as in NPV, if NPV is positive, the discounted payback period will be lesser than the project's life. If NPV is positive, then the PV of the future cash inflows will be greater than the initial outlay costs, thus, Profitability index must be greater than 1. Finally, if the NPV is positive for a certain discount rate i, then it will be zero for some larger rates. Therefore, the IRR must be greater than the required return.

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