Which of the following statements is correct for a project with a positive NPV?
A) The IRR must be greater than 0.
B) Accepting the project has an indeterminate effect on shareholders.
C) The discount rate exceeds the cost of capital.
D) The profitability index equals 1.

Question

Quizplus · Accepted Answer

A positive NPV indicates that the present value of cash inflows exceeds the present value of cash outflows, which means that the project is expected to generate more cash than it costs. The IRR is the discount rate at which the NPV equals zero, so if the NPV is positive, the IRR must be greater than the required rate of return. Therefore, choice A is correct. Choice B is incorrect because accepting the project is expected to increase shareholder wealth. Choice C is incorrect because the cost of capital is the minimum acceptable rate of return, and the discount rate must be equal to or less than the cost of capital to create value. Choice D is also incorrect because the profitability index is the ratio of the present value of future cash flows to the initial investment, and a value of 1 indicates that the project breaks even. A positive NPV implies that the project provides a return greater than the required return, so the profitability index is likely to be greater than 1.

Which of the Following Statements Is Correct for a Project