When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:
A)accepted because the internal rate of return is positive.
B)rejected because the net present value is negative.
C)rejected because the internal rate of return is negative.
D)accepted because the profitability index is negative.
E)accepted because the profitability index is greater than 1.

Question

Quizplus · Accepted Answer

If the present value of the cash inflows exceeds the initial cost of a project, then the project is profitable. The best measure to evaluate the profitability of the project is the profitability index. If the profitability index is greater than 1, it means that the project is expected to generate a positive net present value and should be accepted. Therefore, choice E is the best answer. A is incorrect because the question does not provide information about the internal rate of return. B is incorrect because the net present value is not given. C is incorrect because the question does not provide information about the internal rate of return. D is incorrect because the profitability index should be greater than 1 to accept the project.

When the Present Value of the Cash Inflows Exceeds the Initial