If a project's expected rate of return exceeds its opportunity cost of capital,one would expect:
A) the profitability index to be negative.
B) the opportunity cost of capital to be too low.
C) the project to have a positive NPV.
D) the NPV to be zero.

Question

Quizplus · Accepted Answer

If a project's expected rate of return exceeds its opportunity cost of capital, it means that the project is generating more cash flow than the minimum required return, so it should have a positive net present value (NPV) because the present value of the cash inflows is higher than the present value of the cash outflows. The profitability index measures the ratio of the present value of future cash flows to the initial cost and should be greater than 1 for a project to be acceptable, so if the expected rate of return exceeds the opportunity cost of capital, the project should have a profitability index greater than 1. NPV can be positive, negative, or zero, depending on the present value of cash inflows and outflows.

If a Project's Expected Rate of Return Exceeds Its Opportunity