Question 10 [ 5 marks] Which of the following statements is correct? Choose onlyone. a) If a project has a zero net present value (NPV), its internal rate of return (IRR) is equal to its cost of capital. b) With the discounted payback rule, one can resolve the problem that arises when choosing from mutually-exclusive projects. c) If a project has an investment cost of \( \$ 10 \) million and an NPV of \( \$ 10 \) million, its profitability index is equal to 1 . d) The NPV of investing in a bond is positive because the bond price is lower than the sum of cash flows. e) None of the above. Answer:

To determine which statement is correct, let's analyze each option one by one: a) **If a project has a zero net present value (NPV), its internal rate of return (IRR) is equal to its cost of capital.** - This statement is true. When the NPV is zero, it means that the project's cash flows are exactly equal to the cost of capital, which is the definition of the IRR. b) **With the discounted payback rule, one can resolve the problem that arises when choosing from mutually-exclusive projects.** - This statement is false. The discounted payback rule does not address the issue of mutually exclusive projects effectively, as it only focuses on the time it takes to recover the initial investment, not on the overall profitability of the projects. c) **If a project has an investment cost of \( \$ 10 \) million and an NPV of \( \$ 10 \) million, its profitability index is equal to 1.** - This statement is false. The profitability index (PI) is calculated as \( \text{PI} = \frac{\text{NPV} + \text{Initial Investment}}{\text{Initial Investment}} \). In this case, \( \text{PI} = \frac{10 + 10}{10} = 2 \), not 1. d) **The NPV of investing in a bond is positive because the bond price is lower than the sum of cash flows.** - This statement is misleading. The NPV of a bond is positive if the present value of the cash flows (interest payments and principal) exceeds the bond price. It is not simply because the bond price is lower than the sum of cash flows; it must also consider the time value of money. e) **None of the above.** - Since option (a) is correct, this option is not applicable. Based on the analysis, the correct answer is: **Answer: a)** If a project has a zero net present value (NPV), its internal rate of return (IRR) is equal to its cost of capital.