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Boulderado has come up with a new composite snowboard.Development will take Boulderado four years and cost $250,000 per year,with the first of the four equal investments payable today upon acceptance of the project.Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years.Boulderado's discount rate is 10%.
-The NPV profile graphs:
A)the project's NPV over a range of discount rates.
B)the project's IRR over a range of discount rates.
C)the project's cash flows over a range of NPVs.
D)the project's IRR over a range of NPVs.

Question

Quizplus · Accepted Answer

The NPV profile graphs the project's net present value (NPV) over a range of discount rates. This allows Boulderado to determine the range of discount rates that would make the project economically feasible. The graph plots the initial investment as a negative value at year 0, followed by positive cash flows in years 1-10. By seeing how the NPV changes with different discount rates, Boulderado can determine if the project is financially viable. The IRR (internal rate of return) is not graphed in the NPV profile, but rather the point at which NPV is equal to zero, which is the project's IRR. The cash flows over a range of NPVs is not applicable as the NPV is calculated based on the cash flows.

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