Question

An investment project with a project profitability index of -0.02 has an internal rate of return that is _______ than the discount rate?

1) larger
2) smaller
3) equal
4) cannot be determined

Answer 1

The internal rate of return for an investment project with a profitability index of -0.02 is smaller than the discount rate, indicating that the investment is not favorable.

Step-by-step explanation:

An investment project with a project profitability index of -0.02 has an internal rate of return that is smaller than the discount rate.

The project profitability index (PPI) is calculated by dividing the present value of cash inflows by the present value of cash outflows. A negative PPI of -0.02 indicates that the present value of cash outflows is greater than the present value of cash inflows.

The internal rate of return (IRR) is the interest rate at which the net present value of the project becomes zero. If the PPI is negative, it means that the IRR is lower than the discount rate.