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 profitability index decreases. This is because the profitability index measures the present value of future cash flows in relation to the initial investment, and the discounting of future cash flows becomes more severe as the required rate of return increases. As a result, the profitability index decreases, indicating a lower return on investment. The other options are not affected by changes in the required rate of return in the same way as the profitability index.

As the Required Rate of Return Increases, The