Which of the following statements is correct for a project with a positive NPV?
A)IRR exceeds the cost of capital.
B)Accepting the project has an indeterminate effect on shareholders.
C)The discount rate exceeds the cost of capital.
D)The profitability index equals one.

Question

Quizplus · Accepted Answer

A positive NPV indicates that the project is expected to generate positive cash flows in excess of the required rate of return. IRR is the rate at which the project's NPV equals zero, so if the project has a positive NPV, the IRR must exceed the cost of capital. Therefore, statement A is correct. Statement B is incorrect because accepting a project with a positive NPV will generally have a positive effect on shareholders. Statement C is incorrect because the cost of capital is the required rate of return, so it cannot be less than the discount rate. Statement D is incorrect because the profitability index is calculated by dividing the present value of future cash flows by the initial investment, so it can be greater than one for projects with positive NPVs.

Which of the Following Statements Is Correct for a Project