If a project with conventional cash flows has a profitability index less than one, then:
A) The IRR is greater than the required return.
B) The discounted payback period is greater than the project's life.
C) The AAR is greater than the required return.
D) The payback period is less than the maximum acceptable period.
E) The NPV is positive.

Question

Quizplus · Accepted Answer

A profitability index less than one indicates that the present value of future cash flows is less than the initial investment, meaning the project does not generate enough value to cover its cost. This does not necessarily relate to the IRR being greater than the required return (A), the AAR being greater than the required return (C), the payback period being less than the maximum acceptable period (D), or the NPV being positive (E). Instead, it suggests that the project is not able to recover its initial investment within its life, hence option B is correct.

If a Project with Conventional Cash Flows Has a Profitability