Question

If a project has an initial cost of $50,000 and a profitability index of 0.45, then:...

If a project has an initial cost of $50,000 and a profitability index of 0.45, then:

Group of answer choices

it has a negative NPV.

its cash flow is $ 22,000.

it has a positive NPV.

its NPV could be positive or negative depending on the cost of capital.

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Homework Answers

Answer #1

PI of 0.45 indicates that the PV of future cash flows < Initial Cost. This means that the project has a Negative NPV.

If PI > 1, then project has Positive NPV.

Option A is correct.

Other answer options are incorrect:

  • its cash flow is $ 22,000: No, the present value of cash flows is close to $22,000
  • it has a positive NPV: No, the PI must be > 1 for the project to have a positive NPV.
  • its NPV could be positive or negative depending on the cost of capital: It depends on the PV of the future cash flows and Initial cost.
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