chapter 5

Question 1

when finding profitability index what do we do for the negative cashflow years

Answer 1

do not add them to the cost on the denominator

instead you want to preform regular PV calculations and and take the sum as normal just keep the negative sign there

Question 2

what does a NPV more than zero mean

Answer 2

that the project should be accpted
the profitability index will be more then 1

Question 3

when should a investment be conisdered in regards to IRR

Answer 3

if the IRR is higher then the required rate then the investment should be made

Question 4

if the NPV is above zero what does that mean for the PI

Answer 4

that it will be above one

Question 5

three true statements of when NPV is equal to zero

Answer 5

• just minimally produces a return that is above the rate required to accept the investment
• if the project gets delayed then it will loose money (negative NPV)
• the project is expected to produce a minimal amount of cashflow