The following values have been computed for various independent projects which have a required payback period of 3 years, a required discount rate of 14.5 percent, and a required accounting
Return of 11 percent. Which one of these values indicates an accept decision?
A) Net present value of ($1,200).
B) Accounting rate of return of 10 percent.
C) Proﬁtability index of 1.02.
D) Internal rate of return of 13.6 percent.
E) Payback period of 3.2 years.

Question

Quizplus · Accepted Answer

A profitability index of greater than 1 indicates that the project is expected to generate a positive net present value, which is the case here with a value of 1.02. This means the project is expected to create value and should be accepted. The other values indicate a negative net present value (A), a lower accounting rate of return (B), a lower internal rate of return (D), or a longer payback period (E), which are all less desirable for investment decision-making.

The Following Values Have Been Computed for Various Independent Projects