This NPV profile demonstrates that as the cost of capital increases, the project's NPV:

• A. remains unchanged
• B. decreases
• C. first increases, then decreases
• D. increases

Answer: (B)

Verified step by step guidance

1. Understand the concept of Net Present Value (NPV): NPV is a financial metric used to evaluate the profitability of a project by discounting future cash flows to their present value using a specific cost of capital (discount rate).
2. Recognize the relationship between NPV and the cost of capital: As the cost of capital increases, the discount rate applied to future cash flows also increases, which reduces the present value of those cash flows.
3. Analyze the NPV profile: The NPV profile is a graphical representation of how NPV changes with varying discount rates. Typically, as the cost of capital increases, the NPV decreases because future cash flows are discounted more heavily.
4. Consider the behavior of NPV at different discount rates: At very low discount rates, NPV may be high or positive. As the discount rate increases, NPV generally decreases and may eventually become negative if the cost of capital exceeds the project's return.
5. Conclude the correct answer based on the NPV profile: The correct answer is that as the cost of capital increases, the project's NPV decreases, which aligns with the typical behavior of NPV profiles.