2. Which of the following is true for normal projects if the cost of capital is

Question

2. Which of the following is true for normal projects if the cost of capital is positive?

a)      If a project's IRR is positive, then its NPV will always be positive

b)      If a project's NPV is negative, then its Modified IRR will be negative

c)      If a project's NPV is positive, then its Profitability Index will always be positive

d)     If a project's IRR is positive, then its Discounted Payback Period will exist

Please answer with explanation and correctly. I have answer sheet with me. wrong answer will give you a thumb down.

Explanation / Answer

For normal projects which cost of capital is positive, if a project's NPV is positive, then its Profitability Index will always be positive. NPV is calculated by subtraction of initial investment from present value of future cash flow. If NPV is positive mean present value of future cash flow is more than Initial investment.

Profitability index is calculated by present value of cash flow divided by initial investment. So if present value of future cash flow is positive then Profitability ratio is also positive.

Hence, Option (C) is correct answer.

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