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Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i
Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.
A)Average accounting return that exceeds the requirement
B) Payback period that is shorter than the requirement period
C)Positive net present value
D)Profitability index less than 1.0
E) Internal rate of return that exceeds the required return
Expert Solution
The correct answer is D.
PI=Present value of inflows/Present value of outflows.
Hence if PI is less than 1 it means the present value of inflows is less than the present value of outflows meaning that the project should not be accepted.IF IRR is greater than the required return or if NPV is positive,etc the project should be accepted.
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