You are considering a project with the following data: IRR = 8.7 percent; PI = .

Question

You are considering a project with the following data: IRR = 8.7 percent; PI = .98; NPV = -$393; Payback period = 2.44 years. Which one of the following statements is correct given this information?

The discount rate used in computing the net present value must have been less than 8.7 percent.

The discounted payback period will have to be less than 2.44 years.

The discount rate used to compute the profitability ratio was equal to the internal rate of return.

The required rate of return must be greater than 8.7 percent.

This project should be accepted based on the profitability ratio.

Explanation / Answer

Given the information as provided, it can be inferred that the discounted rate used in computing the net present value must have been less than 8.7 percent, otherwise the project cannot be accepted for a lower Internal Rate of Return or IRR.

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