Question

The internal rate of return on a project is 11.24%. Which of the following (is) are true if the project is assigned a 9.5% discount rate?

I The project will have a negative net present value.
II The profitability index will be greater than 1.0.
III The initial investment is less than the market value of the project.
IV The project will have a positive effect on shareholders if it is accepted.
A) I only
B) II and IV only
C) I and III only
D) II and III only
E) II, III, and IV only

Answer 1

The project will have a positive NPV, profitability index greater than 1.0, initial investment less than the market value, and positive effect on shareholders if accepted.

Step-by-step explanation:

The internal rate of return (IRR) of a project is the discount rate at which the net present value (NPV) of the project becomes zero. In this case, the IRR of the project is 11.24%. When the project is assigned a 9.5% discount rate, the IRR is higher than the discount rate. This means that the project is expected to have a positive NPV, which indicates that it is a financially favorable investment.

Based on this information, the following statements are true:

• I. The project will have a negative net present value. False
• II. The profitability index will be greater than 1.0. True
• III. The initial investment is less than the market value of the project. True
• IV. The project will have a positive effect on shareholders if it is accepted. True

Therefore, the correct answer is option E) II, III, and IV only.