Financial managers should accept any projects with a profitability index ______.
A. > 0
B. > 1
C. <= cost of capital for the company
Answer
Correct Answer: B
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Open it dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>
Original toplevel document
Subject 3. Investment Decision Criteria on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved.
Decision rules:
The higher the NPV, the better. Reject if NPV is less than or equal to 0.
<span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.
Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.
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