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.

Question

Quizplus · Accepted Answer

An NPV profile graph is a graph that shows how a project's NPV varies with the cost of capital. It is a visual representation of the relationship between a project's net present value and the discount rate. The graph is useful for decision-makers to assess the impact of changing the cost of capital on a project's contribution to the firm's value. Therefore, option D is the correct statement among the given options. Option A is incorrect because an NPV profile graph shows how NPV varies with the cost of capital, not payback. Option B is incorrect because the slope of the NPV profile graph depends on the timing and amount of cash flows, not the project's life. Option C is incorrect because an NPV profile graph does not show a project's risk.

Which of the Following Statements Is CORRECT