Question

he internal rate of return on a project is 9%. Which of the following (is) are TRUE if the project is assigned a 8.56% discount rate?

               1. The project will have a negative net present value.

2. The profitability index will be greater than 1.0.

3. The initial investment is less than the market value of the project.

4. The project will have a negative effect on shareholders if it is accepted.

Select one:

a. 1, 2, 3, 4

b. 1, 2, 3

c. 1, 4

d. 2, 3, 4

e. 2, 3

Answer 1

Answer:- Option (E)- 2,3

( Explanation:- As the IRR is 9%, so the project will have NPV will be equal to 0 at 9%. And if the project is assigned a 8.56% rate then it means that NPV will be positive at 8.56% as discount rate and NPV are inversely proportional. So, point 1 will not be true. Hence Option a, b and c will not be the answer as they have point 1 in it.

As at 8.56%, NPV will be positive so the project is financially acceptable.So, it will not have a negative effect on the shareholders if accepted. So, Point 4 is incorrect

As at 8.56%, NPV will be positive so Profitability Index will be more than 1. So, Point 2 is correct.

As at 8.56%, NPV will be positive so we can say that the initial investment is less than the market value of the project. So, point 3 is correct.

So, Point 2,3 is the answer.