The present value ratio of a proposed investment will be:
A) less than 1.0 if the net present value is positive.
B) negative if the proposed investment meets the cost of capital target.
C) less than 1.0 if the net present value is negative.
D)greater than 1.0 if the cost of capital exceeds the internal rate of return.

Question

Quizplus · Accepted Answer

The present value ratio, also known as profitability index, is calculated as the present value of future cash flows divided by the initial investment. If the net present value is negative, the present value of cash inflows is less than the initial investment, resulting in a present value ratio less than 1.0. Therefore, choice C is the correct answer. The other options are incorrect statements.

The Present Value Ratio of a Proposed Investment Will Be