Question

A project has a required return of 15% and a five year life. Which of the following is inconsistent with the other four?

A) The discounted payback is five years
B) PI = 0
C) NPV = $0
D) IRR = 15%
E) The present value of the future cash flows equals the initial outlay

Answer 1

The inconsistent statement in this case is option B) PI = 0.

Step-by-step explanation:

The inconsistent statement in this case is option B) PI = 0. The profitability index (PI) is calculated by dividing the present value of future cash flows by the initial outlay. If the PI is greater than 1, it indicates that the project is expected to be profitable. A PI of 0 means that the present value of future cash flows is equal to zero, which implies that the project is not expected to generate any profits. This is contradictory to the required return of 15% and the other statements that suggest the project is expected to have positive cash flows.

When evaluating a project with a required return of 15%, the inconsistent option among given statements is PI=0. The other options are mutually consistent as they suggest a project that breaks even financially, with an IRR equal to the required return and present values that match the initial outlay.