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Chapter 4: Q8DQ (page 405)

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

Short Answer

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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

01

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.

02

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.

03

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.

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Most popular questions from this chapter

Del Monty will receive the following payments at the end of the next three years: \(2,000, \)3,500, and \(4,500. Then from the end of the 4th year through the end of the 10th year, he will receive an annuity of \)5,000 per year. At a discount rate of 9 percent, what is the present value of all three future benefits?

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Question:Surgical Supplies Corporation paid a dividend of $1.12 per share over the last 12 months. The dividend is expected to grow at a rate of 2.5 percent over the next three years (supernormal growth). It will then grow at a normal, constant rate of 7 percent for the foreseeable future. The required rate of return is 12 percent (this will also serve as the discount rate).

a. Compute the anticipated value of the dividends for the next three years (D1, D2, and D3).

b. Discount each of these dividends back to the present at a discount rate of 12 percent and then sum them.

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P3 = D4/ (Ke - g)

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e. Add together the answers in part b and part d to get the current value of the stock. (This answer represents the present value of the first three periods of dividends plus the present value of the price of the stock after three periods.)
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