Holding all else equal, the profitability index will fall following an increase in the:

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated by dividing the present value of future cash flows by the initial investment. An increase in the cost of capital would decrease the present value of future cash flows, and thus decrease the profitability index. Therefore, choice A is the correct answer. An increase in benefit-cost ratio, IRR, or NPV would all increase the profitability index, since these metrics are all related to the present value of future cash flows and the initial investment.

Holding All Else Equal, the Profitability Index Will Fall Following