As the required rate of return increases, the:
A) Net present value increases.
B) Payback period decreases.
C) Profitability index decreases.
D) Discounted payback period decreases.
E) Average accounting return decreases.

Question

Quizplus · Accepted Answer

As the required rate of return increases, the present value of future cash flows decreases, leading to a lower profitability index. The profitability index is calculated as the present value of future cash flows divided by the initial investment, so as the discount rate (or required rate of return) increases, the denominator stays the same but the numerator decreases, thus decreasing the profitability index.

As the Required Rate of Return Increases, The