For mutually exclusive projects: You accept one or none You accept two or more Y

ID: 2788423 • Letter: F

Question

For mutually exclusive projects:

You accept one or none You accept two or more You may accept two or more You MUST accept one

What is the profitability index for this proposed project if the required rate of return is 13%?

4 700,000

The discount rate that produces an NPV = 0 is the:

Break-even return

Conventional return

Zero return

Base return

Internal rate of return

Year Cash Flows 0 -1,000,000 1 200,000 2 400,000 3 300,000

4 700,000

The discount rate that produces an NPV = 0 is the:

Break-even return

Conventional return

Zero return

Base return

Internal rate of return

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

NPV = -1000000 + 200000/(1+0.13)^1 + 400000/(1+0.13)^2 + 300000/(1+0.13)^3 + 700000/(1+0.13)^4 = 127487.98

PI = NPV + Initial investment / Initial investment

PI = (127487.98 + 1000000) / 1000000 = 1.13

- The discount rate that produces an NPV = 0 is the: Internal rate of return

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