Spring Company has invested £20,000 in a project. Spring's discount rate is 12% and the profitability index on the project is 1.00. Which of the following statements would be true
I. The present value of the project's net cash flows is £20,000.
II. The project's internal rate of return is equal to 12%.
A)Only I.
B)Only II.
C)Both I and II.
D)Neither I nor II.

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of future cash flows divided by the initial investment. A profitability index of 1.00 indicates that the present value of the project's net cash flows equals the initial investment, which is £20,000, making statement I true. Additionally, when the profitability index is 1.00, it means the project's return is exactly equal to the discount rate, making statement II true as well.

Spring Company Has Invested £20,000 in a Project