What would happen to the net present value and profitability index for each project if the required rate of return increased?
2007-09-16 05:25:18 · 3 answers · asked by BxBmr76 1 in Science & Mathematics ➔ Mathematics
The present value of a single cash flow is:
C/(1+R)^N
where R is the required rate and N is the number of periods until you get the cash flow.
Note that if R increases, then the denominator of the fraction increases -- causing the value to decrease.
If rates go up, PV goes down -- and vice versa.
2007-09-16 05:46:46 · answer #1 · answered by Ranto 7 · 0⤊ 0⤋
A decrease in value and profitability index. When the *required* rate of return increases, the related projects become more of a *liability* -- also implied is more expense to run, which zaps the bottom line (profitability) ... that's why.
Tricky question, because intuitively, you'd think increase, right?
Note that your textbook may disagree. And that's why they say there's always a dichotomy between the real world and textbook. Good luck with your class. Not everything you learn there will go unused.
2007-09-16 12:41:05 · answer #2 · answered by gene_frequency 7 · 0⤊ 0⤋
a graphic growth.
2007-09-16 12:33:18 · answer #3 · answered by jimmybond 6 · 0⤊ 0⤋