Select Any One Of the Following Options: The relationship between NPV and cost of capital has _________ and ___________ relationship.inverse, non-linear12L15.5Linverse-line
Question
Select Any One Of the Following Options: The relationship between NPV and cost of capital has _________ and ___________ relationship.inverse, non-linear12L15.5Linverse-line
Solution
The relationship between NPV (Net Present Value) and cost of capital has an inverse and non-linear relationship.
Here's why:
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Inverse Relationship: As the cost of capital increases, the NPV decreases. This is because the cost of capital is the discount rate used in the NPV calculation. A higher discount rate reduces the present value of future cash flows, thus reducing the NPV.
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Non-linear Relationship: The relationship is not a straight line but a curve. This is because the discount rate is applied exponentially in the NPV calculation. As the cost of capital increases, the rate at which the NPV decreases also increases. This results in a curve rather than a straight line.
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