Which of the following statements is correct?
Click on the arrows to vote for the correct answer
A. B. C. D.C
Option B is the correct statement.
NPV (Net Present Value) is the difference between the present value of cash inflows and the present value of cash outflows. The positive NPV indicates that the project's inflows are greater than its outflows, whereas a negative NPV indicates that the project's outflows are greater than its inflows.
PI (Profitability Index) is a ratio of the present value of cash inflows to the present value of cash outflows. A PI greater than 1 indicates that the project's present value of cash inflows is greater than the present value of cash outflows, whereas a PI less than 1 indicates that the present value of cash outflows is greater than the present value of cash inflows.
IRR (Internal Rate of Return) is the discount rate that makes the NPV of a project equal to zero. A project with an IRR greater than the required rate of return is expected to be profitable.
Now let's analyze each option:
Option A: If the NPV of a project is greater than 0, it means that the present value of cash inflows is greater than the present value of cash outflows. Therefore, the project is expected to be profitable. If a project has a positive NPV, its PI will be greater than 0, not equal to 0.
Option B: If the IRR of a project is 0%, it means that the project's cash inflows are equal to its cash outflows, so the project's NPV, using a discount rate k greater than 0, will be 0. This is because the discounting of cash flows to present value at a positive discount rate will reduce the present value of cash inflows to the same level as the present value of cash outflows. Therefore, option B is correct.
Option C: If the PI of a project is less than 1, it means that the present value of cash inflows is less than the present value of cash outflows, which indicates that the project is not expected to be profitable. Therefore, the NPV of such a project should be less than 0.
Option D: If the IRR of a project is greater than the discount rate k, it means that the project's cash inflows are expected to be greater than the cash outflows, so the project is expected to be profitable. In this case, the PI will be greater than 1, not less than 1. Additionally, the NPV will be positive, not negative.
In summary, option B is the correct statement, and the other options are incorrect.