Which one of the following should be assumed about a project that requires a $100,000 investment at time zero,then returns $20,000 annually for 5 years?
A) The NPV is negative.
B) The NPV is zero.
C) The profitability index is 1.0.
D) The IRR is negative.

Question

Quizplus · Accepted Answer

The project requires a $100,000 investment at time zero, and only returns $20,000 annually for 5 years. This means that the total return over the 5-year period is only $100,000 ($20,000 x 5), which is equal to the initial investment. Therefore, the project has zero net present value (NPV), and the profitability index is also equal to one. However, since the investment is not recouped until the end of the 5-year period, the IRR is likely to be negative. Overall, the project is not a good investment based on the low returns and lack of positive NPV.

Which One of the Following Should Be Assumed About a Project