Answer (D) is correct . The profitability index is the ratio of the present value of future net cash inflows to the initial net cash investment. It is a variation of the NPV method that facilitates comparison of different-sized investments. A profitability index greater than 1.0 indicates a profitable investment or one that has a positive net present value.
Answer (A) is incorrect because The IRR is the discount rate at which the NPV is $0, which is also the rate at which the profitability index is 1.0. The IRR cannot be determined solely from the index.
Answer (B) is incorrect because If the index is 1.15 and the discount rate is the cost of capital, the NPV is positive, and the IRR must be higher than the cost of capital.
Answer (C) is incorrect because The IRR is a discount rate, whereas the NPV is an amount.
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