An analyst is developing net present value (NPV) profiles for two investment projects. The only difference between the two projects is that Project 1 is expected to receive larger cash flows early in the life of the project, while Project 2 is expected to receive larger cash flows late in the life of the project. The slope of the NPV profile for Project 1 when compared to the slope of the NPV profile for Project 2 is most likely:
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A. B. C. D.B
The slope of the net present value (NPV) profile is a measure of how sensitive the NPV of an investment is to changes in the discount rate. A steeper slope indicates that the NPV is more sensitive to changes in the discount rate, while a flatter slope indicates that the NPV is less sensitive to changes in the discount rate.
In this scenario, the only difference between Project 1 and Project 2 is the timing of the cash flows. Project 1 has larger cash flows earlier in the life of the project, while Project 2 has larger cash flows later in the life of the project.
To determine the slope of the NPV profiles for these projects, we need to calculate the NPV for each project at different discount rates. The NPV is calculated by discounting the cash flows of the project using the appropriate discount rate.
When the discount rate is low, the NPV of Project 1 will be higher than the NPV of Project 2, since Project 1 receives larger cash flows earlier in the life of the project. As the discount rate increases, the NPV of Project 1 will decrease faster than the NPV of Project 2, since the larger cash flows received earlier in the life of the project are more heavily discounted.
Therefore, the slope of the NPV profile for Project 1 is steeper than the slope of the NPV profile for Project 2.
The correct answer is C. Steeper.