Assume a project has normal cash flows and a positive (non-zero)net present value.The project's
A)profitability index will be less than 1.
B)internal rate of return will exceed its required rate of return.
C)costs exceed its benefits.
D)discounted payback period will exceed the life of the project.
E)payback period must equal the life of the project.

Question

Quizplus · Accepted Answer

A positive net present value indicates that the project's expected cash inflows are greater than its expected cash outflows when discounted to the present at the required rate of return. This means that the internal rate of return (the discount rate at which the project's net present value equals zero) must be greater than the required rate of return. Thus, choice B is the correct answer. The profitability index (the ratio of the present value of the project's expected cash inflows to the present value of its expected cash outflows) would be greater than 1 for a project with a positive net present value. Costs cannot exceed benefits if the net present value is positive. The discounted payback period (the length of time it takes for the project's discounted cash inflows to equal its initial investment) may be less than or equal to the life of the project if the project has normal cash flows. The payback period (the length of time it takes for the project's expected cash inflows to equal its initial investment) may be less than or equal to the life of the project, but it does not necessarily have to equal the life of the project.

Assume a Project Has Normal Cash Flows and a Positive