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?

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

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

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

d.This project should be accepted based on the profitability ratio

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

Explanation / Answer

c.The required rate of return must be greater than 8.7 percent.Since IRR is 8.7% and NPV is negative it means required rate is more than 8.7%

Other statements are incorrect due to mentioned reasons

a.The discount rate used to compute the profitability ratio was equal to the internal rate of return - Should be required rate

b. The discounted payback period will have to be less than 2.44 years. - More than 2.44 Years

d.This project should be accepted based on the profitability ratio - Rejected since profitability is less than 1

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

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