6. A project has a discounted payback period that is equal to the required payba

Question

6. A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true?
I. The project must also be acceptable under the payback rule.
II. The project must have a profitability index that is equal to or greater than 1.0.
III. The project must have a zero net present value.
IV. The project's internal rate of return must equal the required return.
A. I only
B. I and II only
C. II and III only
D. I, III, and IV only
E. I, II, III, and IV

Explanation / Answer

The correct answer is D:

This is becuse of the following reasons:

Since required payback period = discounted pay back period, the project must also be acceptable under the payback rule (I). Also, the IRR = Required rate (IV). Since IRR = Required rate, the NPV = 0 (III).

Since NPV = 0, The profitability index = 1. It cannot exceed 1.

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