You are considering a project with the following data: Internal rate of return 8.7%
Profitability ratio .98
Net present value -$393
Payback period 2.44 years
Required return 9.5%
Which one of the following is correct given this information?
A) The discount rate used in computing the net present value must have been less than 8.7%.
B) The discounted payback period will have to be less than 2.44 years.
C) The discount rate used to compute the profitability ratio was equal to the internal rate of return.
D) This project should be accepted based on the profitability ratio.
E) This project should be rejected based on the internal rate of return.

Question

Quizplus · Accepted Answer

The internal rate of return (8.7%) is less than the required return (9.5%), indicating that the project's return is not sufficient to meet the required minimum rate of return. Therefore, the project should be rejected based on the internal rate of return. The negative net present value (-$393) also supports this decision. The profitability ratio (.98) is irrelevant in this case as it is less than 1, indicating a negative return on investment. The discounted payback period is also not applicable as it depends on the discounted cash flows, which are not provided in the data. Lastly, the discount rate used for the net present value calculation can be higher or lower than the internal rate of return, making option A incorrect.

You Are Considering a Project with the Following Data: Internal