Which of the following statements best describes an NPV profile graph?
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.

Question

Quizplus · Accepted Answer

An NPV profile graph shows how a project's contribution to the firm's value (measured by NPV) varies with the cost of capital. It plots the project's NPV on the y-axis against various discount rates (representing different costs of capital) on the x-axis. The shape of the graph can help decision makers determine the optimal cost of capital and/or the optimal project life that maximizes the project's contribution to the firm's value.

Which of the Following Statements Best Describes an NPV Profile