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In capital budgeting, which of the measures should be larger than one and accept it? NPV...

In capital budgeting, which of the measures should be larger than one and accept it?

NPV

IRR

MIRR

PI
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Answer #1

A positive NPV means that the sum of present value of future cash flow is greater than the cash outflow. This implies that the project is profitable and hence acceptable. A negative NPV means that the sum of present value of future cash flow is less than the cash outflow. Thus

If the IRR of a project is greater than or equal to the project's cost of capital, accept the project. However, if the IRR is less than the project's cost of capital, reject the project.

According to MIRR, The project should be accepted if the modified internal rate of return is greater than the cost of capital.

Profitability index, also known as profit investment ratio and value investment ratio, is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment. Thus whenever the PI is greater than 1, select the project otherwise reject it.

Thus, PI method the project is slected if the PI is greater than 1.

ANS: PI

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