Question

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.

Answer 1

Answer:

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.

Explanation:

NPV is Net Present Value of a project. It basically calculates the entire return on project. It is the discounted value of the net returns of the project. Its graph basically demonstrates the contribution of the project, and its difference in cost of capital.

It clearly assumes to add value to the company's contributions if it is more than 0, accordingly the returns are more than cost of capital if NPV is more than 0.