Which of the following statements is CORRECT?
A) An NPV profile graph shows how a project's payback varies as the cost of capital changes.
B) The NPV profile graph for a normal project will generally have a positive (upward)slope as the life of the project increases.
C) An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life.
D) An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital.
E) We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.

Question

Quizplus · Accepted Answer

The NPV profile graph shows how a project's NPV varies as the cost of capital changes. It is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. Option A is incorrect as the graph shows the project's NPV, not payback. Option B is incorrect as the slope can be positive or negative depending on the project's cash flows. Option C is incorrect as the graph does not provide information about a project's risk. Option E is incorrect as we can estimate the appropriate WACC from the graph.

Which of the Following Statements Is CORRECT