Cost of Capital: Decreasing Cash Flow

Conceptual Overview: Explore how the cost of capital affects the net present value of an investment project's decreasing cash flow.

This graph shows the net present value of an investment with annual cash flows of $-$$$1,000,$$$500,$$$400,$$$300,$ and $$100$ as a function of different costs of capital $($interest $\%).$ Note that this cash flow returns declining amounts after the initial investment. Drag left or right on the graph to move the cursors to see the net present value $($NPV$)$ for different costs of capital. The point where the curve crosses the X$-$axis determines the internal rate of return $($IRR$).($Note: due to limited pixel resolution, it is sometimes difficult to get to that precise point.$)$

$NPV=C{F}_0+{\displaystyle \underset{t=1}{\overset{N}{}}}\frac{C{F}_t}{(1+r{)}^t}=-$$$1,000+\frac{\text{\$}500}{(1+0\mathrm{.}1000{)}^1}+\frac{\text{\$}400}{(1+0\mathrm{.}1000{)}^2}+\frac{\text{\$}300}{(1+0\mathrm{.}1000{)}^3}+\frac{\text{\$}100}{(1+0\mathrm{.}1000{)}^4}=$$$78\mathrm{.}82$