Which of the statements below is TRUE? A) If we realize that NPV is the present

Question

Which of the statements below is TRUE?

A) If we realize that NPV is the present value of the benefits minus the present value of the costs, then we simply need to subtract the costs to the NPV to get the present value of the benefits.

B) There are two acceptable projects, but we can only take one due to a shortage of funds. The PI for these two projects are: Project A: 2.25; Project B: 1.89. We would take Project B.

C) A PI of 1.50 can be interpreted as meaning that for every $1.00 invested today the firm gets back $1.50 in current dollars.

D) According to the profitability index (PI) decision criterion when the PI is greater than 1, the cost exceed the benefits.

Explanation / Answer

Hi,

Please find the answer as follows:

Option C ( A PI of 1.50 can be interpreted as meaning that for every $1.00 invested today the firm gets back $1.50 in current dollars) is the correct answer.

Notes:

Option A = Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outlows

Option B = Project A should be accepted as it offers a higher PI.

Option D = When PI is greater than 1, benefits exceed costs.

Thanks.

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