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    Question

    A project can be accepted if:

    A (NPV) > 0, (IRR) > k and (PI > 1) Correct Answer Incorrect Answer
    B (NPV) < 0, (IRR) < k and (PI < 1) Correct Answer Incorrect Answer
    C (NPV) ≤ 0, (IRR) ≤ k and (PI > 1) Correct Answer Incorrect Answer
    D (NPV) > 0, (IRR) ≤ k and (PI ≤1) Correct Answer Incorrect Answer

    Solution

    The three most widely used techniques for capital budgeting include Net Present Value (NPV), Internal rate of return (IRR) and Profitability Index (PI). A project is acceptable under the three approaches as follows: ·       NPV = PV of Cash inflows – PV of cash outflows. If NPV is positive i.e.  >0, thr project is positive and therefore acceptable ·       IRR is the internal rate of return which when more than the cost of capital (k) of the project, gives positive results. As such when IRR>k, project is acceptable ·       PI = PV of Cash inflows / PV of cash outflows. As such when PI > 1, the project is positive

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