If a company has computed the profitability index of an investment project as 1.15, then
A)the project's internal rate of return is less than the discount rate.
B)the project's internal rate of return is greater than the discount rate.
C)the project's internal rate of return is equal to the discount rate.
D)the relationship of the rate of return and the discount rate is impossible to determine from the data given.

Question

Quizplus · Accepted Answer

A profitability index of 1.15 indicates that for every $1 invested in the project, the company can expect to receive $1.15 in return. This means that the project is expected to generate a return that is greater than the cost of the investment, which is represented by the discount rate. Therefore, the project's internal rate of return is greater than the discount rate.

If a Company Has Computed the Profitability Index of an Investment