How should a profitability index of zero be interpreted?
A)The present value of the cash flows subsequent to the initial cash flow is equal to (−1 × Initial cash flow).
B)The project has an internal rate of return equal to the discount rate.
C)The project produces a net income of zero for every year of its life.
D)The project's cash flows subsequent to the initial cash flow have a present value of zero.
E)The project also has a net present value of zero.

Question

Quizplus · Accepted Answer

A profitability index of zero means that the present value of the cash flows subsequent to the initial cash flow is zero. This implies that the project's cash flows subsequent to the initial cash flow have a present value of zero, which is option D. It does not mean that the project has an internal rate of return equal to the discount rate, produces a net income of zero for every year of its life, or has a net present value of zero, as these are different measurements of a project's profitability. Option A is also incorrect as it assumes that the initial cash flow is negative, which is not necessarily the case.

How Should a Profitability Index of Zero Be Interpreted