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

Question

Quizplus · Accepted Answer

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. The graph shows the relationship between NPV and the discount rate or cost of capital. The slope of the graph (upward or downward) indicates the project's sensitivity to changes in the cost of capital, while the intersection of the graph with the horizontal axis represents the internal rate of return (IRR) of the project. The NPV profile graph can help decision makers to identify the range of discount rates at which the project will have positive NPV and hence be acceptable for investment.

Which of the Following Statements Is CORRECT