If a project costing $40000 has a profitability index of 1 and the discount rate was...

Question

Question

If a project costing $40000 has a profitability index of 1 and the discount rate was 15%, then the project’s internal rate of return was

less than 15%.

equal to 15%.

greater than 15%.

undeterminable.

Answer 1

Answer #1

profitability index = present value annual cash inflow/ initial investment

1 =present value of annual cash inflow /$40000
present value of annual cash inflow =$400000

IRR means the rate at which present value of cash inflows are equal to initial investment .
Hence in the present case IRR would be equal to 15%

Answer 2

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