When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:
A) accepted because the internal rate of return is positive.
B) accepted because the profitability index is greater than 1.
C) accepted because the profitability index is negative.
D) rejected because the internal rate of return is negative.
E) rejected because the net present value is negativE.

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of cash inflows by the initial cost of the project. A profitability index greater than 1 indicates that the present value of the cash inflows exceeds the initial cost of the project. Therefore, choosing option B to accept the project is the correct decision. Option A also represents a correct decision criterion, as a positive internal rate of return also indicates that the project is generating a return greater than the cost of capital. However, the question specifically asks about the present value of the cash inflows exceeding the initial cost, which is more directly captured by the profitability index. Options C, D, and E should be rejected as they represent incorrect or incomplete decision criteria.

When the Present Value of the Cash Inflows Exceeds the Initial