If a company has computed a project profitability index of -0.015 for an investment project, 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 internal rate of return and the discount rate is impossible to determine from the data given.

Question

Quizplus · Accepted Answer

A project profitability index (PPI) less than 0 indicates that the project's present value of cash outflows is greater than its present value of cash inflows. This means that the internal rate of return (IRR) is less than the discount rate (i.e. the cost of capital). Therefore, choice A is correct. Choice B is incorrect because a PPI greater than 1 would indicate that the project's IRR is greater than the discount rate. Choice C is incorrect because a PPI of 1 would indicate that the project's IRR is equal to the discount rate. Choice D is incorrect because the data does provide enough information to determine the relationship between the IRR and the discount rate.

If a Company Has Computed a Project Profitability Index of -0.015