Which one of the following statements is correct?
A) A negative net present value indicates that a project is acceptable.
B) A proﬁtability index that is less than 1.0 indicates that a project is acceptable.
C) A project with a net present value of zero is earning exactly the required rate of return.
D) When the internal rate of return is less than the required rate, the project should be accepted.
E) If the accounting rate of return exceeds the required discount rate, the project should be accepted.

Question

Quizplus · Accepted Answer

A negative net present value (NPV) indicates that a project is not acceptable as it means the project's expected cash flows are not sufficient to cover the required rate of return. A profitability index (PI) less than 1.0 also indicates an unacceptable project as it means the present value of future cash flows is less than the initial investment. When the NPV is zero, it means the project is earning exactly the required rate of return, so it is acceptable. When the internal rate of return (IRR) is less than the required rate, the project should be rejected as it means the project's rate of return is lower than the cost of capital. Lastly, the acceptance of a project based on the accounting rate of return (ARR) and required discount rate depends on the company's policies, but generally, if the ARR exceeds the required discount rate, the project can be accepted. However, ARR does not consider the time value of money and ignores cash flows beyond the payback period, so other methods such as NPV and IRR should also be considered. Therefore, option C is the correct statement as it accurately describes a project earning the required rate of return.

Which One of the Following Statements Is Correct