Which one of the following indicates that a project is expected to create value for its owners?
A)a profitability index less than 1.0
B)a payback period greater than the requirement
C)a positive net present value
D)a positive average accounting rate of return
E)an internal rate of return that is less than the requirement

Question

Quizplus · Accepted Answer

A positive net present value indicates that the present value of the expected cash inflows from the project exceeds the present value of the cash outflows. This means that the project is expected to generate value for its owners. Option A (profitability index less than 1.0) and option E (internal rate of return that is less than the requirement) both indicate that the project may not be profitable enough to create value for its owners. Option B (payback period greater than the requirement) only gives information about the time it takes for the initial investment to be recovered and does not indicate value creation. Option D (positive average accounting rate of return) is a measure of the average return on the investment and does not take into account the timing of the cash flows or the value created for the owners.

Which One of the Following Indicates That a Project Is