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

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

Answer: (C)

Verified step by step guidance

1. Understand the concept of Net Present Value (NPV): NPV is the difference between the present value of cash inflows and outflows over a period of time. It is used to evaluate the profitability of a project.
2. Recognize the relationship between NPV and the cost of capital: The cost of capital is the discount rate used to calculate the present value of future cash flows. As the cost of capital increases, the present value of future cash flows decreases, which impacts the NPV.
3. Analyze the NPV profile: The NPV profile is a graph that shows the relationship between the NPV of a project and different discount rates (costs of capital). Typically, the NPV decreases as the cost of capital increases because future cash flows are discounted more heavily.
4. Consider the behavior of NPV at different discount rates: At lower discount rates, the NPV is higher because cash flows are discounted less. As the discount rate increases, the NPV decreases, reflecting the reduced value of future cash flows.
5. Conclude the trend: Based on the NPV profile, the project's NPV decreases as the cost of capital increases. This is a fundamental principle in financial accounting and capital budgeting.