Question

An NPV profile plots a project's NPV at various costs of capital. A project's NPV profile is shown as follows. Identify the range of costs of capital that a firm would use to accept and reject this project. NPV (Dollars) 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) This NPV profile demonstrates that as the cost of capital increases, the project's NPV decreases increases

Answer 1

A & B are the cost of Capitals in this NPV profile.

The value of A (i.e the range of cost of capital for the acceptance of the project) = 0% to 12%
[Below 12%]

The value of B (i.e the range of cost of capital for the rejection of the project) = 12% to 20%
[Above 12%]

NPV = present value of cash inflow- the present value of cash outflow.

Discounted at the cost of capital/required rate of return.

NPV must be positive for the acceptance of the project.

In the following NPV profile:
As the cost of capital increases the NPV decreases.