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. This project should be accepted based on the profitability ratio. The required rate of return must be greater than 8.7 percent.

Explanation / Answer

in the above example NPV has -ve value and project that have a negative net present value will not have a discounted value and also an indicator of that required rate of return is more then IRR.

HENCE Statement "the required rate of return must be greater than 8.7 %" is correct

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