Which of the following statements is necessarily true?
A)If the profitability index is equal to 1.0, the net present value of the project is equal to 0.
B)If the profitability index is equal to 0, the net present value of the project is also 0.
C)If the profitability index is equal to 0, the internal rate of return is equal to the hurdle rate.
D)If the profitability index is equal to 1.0, the internal rate of return is greater than the hurdle rate.

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of future cash flows divided by the initial investment. If the profitability index is equal to 1.0, it means that the present value of future cash flows is equal to the initial investment, so there is no net gain or loss (i.e. the net present value is equal to 0). The profitability index is calculated as the ratio of the present value of future cash flows to the initial investment. If the profitability index is 1.0, it means that the present value of future cash flows is equal to the initial investment. Therefore, the net present value of the project is also equal to 0.

Which of the Following Statements Is Necessarily True