Question

Given the cash flows in the following table, the point at which the NPV profile crosses the vertical axis (i.e., the y-intercept) is _____.

a) The payback period.
b) The internal rate of return.
c) The net present value.
d) The accounting rate of return.

Answer 1

The point at which the NPV profile crosses the vertical axis (y-intercept) represents the net present value (NPV) of the cash flows at a zero discount rate.

Step-by-step explanation:

The point at which the NPV profile crosses the vertical axis is the net present value (NPV) of the cash flows at a zero discount rate. This means that it is not impacted by the cost of capital or interest rates because a zero discount rate implies no time value of money. Therefore, the correct answer is c) The net present value. The y-intercept of the NPV profile signifies the NPV of the project when the discount rate is 0%. At this point, the NPV is simply the sum of the undiscounted cash flows over the project's life.