If a project has a cost of $50,000 and a profitability index of 2,then:
A) it has a negative NPV.
B) its NPV could be positive or negative depending on the cost of capital.
C) its cash flow is $100,000.
D) it has a positive NPV.

Question

Quizplus · Accepted Answer

A profitability index (PI) of 2 implies that for every dollar invested, the project is expected to generate $2 in present value terms. Since PI > 1, it implies that the project's net present value (NPV) is positive.

NPV = Present value of cash inflows - Present value of cash outflows.

Thus, if PI = 2, it implies that the present value of cash inflows is $100,000 ($50,000 x 2) and the present value of cash outflows is $50,000.

Therefore, NPV = $100,000 - $50,000 = $50,000, which is positive.

Hence, the correct answer is D.

If a Project Has a Cost of $50,000 and a Profitability