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In: Finance

For a project with normal cash flows, if IRR = the required return (discount rate), then...

For a project with normal cash flows, if IRR = the required return (discount rate), then NPV = 0, and the profitability index = 1.0.

Group of answer choices

True

False

Expert Solution

For a project with normal cash flows, if IRR = the required return (discount rate), then NPV = 0, and the profitability index = 1.0.

Answer: True

IRR is the rate or the firm's cost of capital that makes the present value of the project's cash inflows equal the initial investment.

I.e. IRR is the rate at which NPV is Zero.

NPV = Present value of project cash inflows – Initial Investment

Profitability Index = Present value of project cash inflows ÷ Initial Investment

When NPV is Zero, Present value of project cash inflows & Initial Investment will be same.

In that case profitability Index will be 1

Example

Initial Investment = $ 1000

Present Value of cash inflows = $ 1000

NPV = Present value of project cash inflows – Initial Investment

= $1000 - $1000

=$0

Profitability Index = Present value of project cash inflows ÷ Initial Investment

= $1000 ÷ $1000

=1

jeff jeffy answered 4 days ago

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