An analyst is developing net present value (NPV) profiles for two investment projects. The only difference between the two projects is that Project 1 is expected to receive larger cash flows early in the life of the project, while Project 2 is expected to receive larger cash flows late in the life of the project. The slope of the NPV profile for Project 1 when compared to the slope of the NPV profile for Project 2 is most likely:

Question

Quizplus · Accepted Answer

The slope of an NPV profile is a measure of the project's sensitivity to changes in the discount rate. A flatter slope implies greater sensitivity to discount rate changes, while a steeper slope implies lower sensitivity to discount rate changes.

Since Project 1 receives larger cash flows early in the life of the project, the early cash flows are worth more in present value terms than the later cash flows. This means that project 1 is more sensitive to changes in the discount rate in the early stages of the project, thus resulting in a flatter slope compared to Project 2, which is more sensitive to changes in the discount rate in the later stages, thus resulting in a steeper slope. Therefore, choice B is the best answer.

An Analyst Is Developing Net Present Value (NPV) Profiles for Two