Question

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​(1) In​ general, if NPV​ = 0, then what IRR would be equal​ to? ​(2) In​...

​(1) In​ general, if NPV​ = 0, then what IRR would be equal​ to?

​(2) In​ general, if NPV​ > 0, then what PI​ (Profitability Index) would be equal​ to?

Solutions

Expert Solution

1. If NPV = 0, Then the IRR would be equal to the Weighted average cost of capital (WACC) Which is also termed as Discount rate.

The Net present value is the Present worth of the project, it is calculated by discounting the cash flows of the project which is the Wacc and then subtracted from the intiial investment of the project, and the internal rate of return is the return at which the present value of cash flows if discounted comes equal to the initial investment, so when the NPV = 0 then the IRR will be equal to the WACC.

2. If NPV >0 , then the PI would be Greater than

If the NPV is more than 1, then it means that the present value of cash flows is greater than the initial investment and the Profitbaility index is claculated by dividing the sum of present value of cash flows by the initial invesment, so of the Net present value is more than 1, the Profitbality index would result in Greater than 1.0.

jeff jeffy answered 2 years ago
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