Question

What is the net present value profile? What three points should be determined to graph the profile? (LO12-4)

Short answer

Answer

The method used to graph the net present value is known as the net present value profile. The business entity must determine the NPV at 0% and normal discount rate and IRR for preparing a graph of NPV.

Step-by-step solution

Definition of Discount Rate

In the calculation of NPV, the discounting rate can be defined as the rate at which an investor expects to generate a return from the investment.

Net present value profile

A method that allows a business entity to plot the graph for the net present value of a project calculated at different interests is known as the net present value profile. Net present value is reflected on the vertical axis, and discount rates are reflected on the horizontal axis.

Three points that must be determined

1. Net present value of the proposed project at a discount rate of 0%.

2. Net present value of the proposed project at a normal discounting rate.

3. IRR of the proposed investment.