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Question:

ChemCo is evaluating a project based on the principles of capital budgeting. ChemCo should accept the project if it has a:

A
profitability index greater than one.

Explaination

Several decision criteria are available when evaluating a standalone project. These criteria include net present value (NPV), profitability index (PI), and internal rate of return (IRR). The decision rules for these measures are as follows.

NPV: If NPV > 0, accept project

If NPV < 0, reject project

PI: If PI > 1, accept project

If PI < 1, reject project

IRR: If IRR > required return, accept project

If IRR < required return, reject project

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