Which one 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 implies that the present value of cash inflows is greater than the present value of cash outflows, which in turn means that the project's rate of return is greater than the required rate of return. The required rate of return is represented by the discount rate. When the rate of return is greater than the required rate of return, the IRR must be greater than 0. Therefore, statement A is correct. Statement B is incorrect because accepting a project with a positive NPV will increase shareholder wealth. Statement C is incorrect because the cost of capital should exceed the discount rate. Statement D is incorrect because the profitability index is calculated by dividing the present value of cash inflows by the present value of cash outflows, and it can be greater or less than 1 for a project with a positive NPV.

Which One of the Following Statements Is Correct for a Project