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#analyst-notes #cfa-level-1 #reading-35-capital-budgeting #study-session-10

Some observations on NPV profile:

  • The IRR is the discount rate that sets the NPV to 0.
  • The NPV profile declines as the discount rate increases.
  • Project A has a higher NPV at low discount rates, while Project B has a higher NPV at high discount rates. The NPV profiles of Project A and B join at the crossover rate, at which the projects' NPVs are equal.
  • The slope of Project A's NPV profile is steeper. This indicates that Project A's NPV is more sensitive to changes in the discount rates.
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Subject 4. NPV Profiles
showing the relationship between a project's NPV and the firm's cost of capital. The point where a project's net present value profile crosses the horizontal axis indicates a project's internal rate of return. <span>Some observations: The IRR is the discount rate that sets the NPV to 0. The NPV profile declines as the discount rate increases. Project A has a higher NPV at low discount rates, while Project B has a higher NPV at high discount rates. The NPV profiles of Project A and B join at the crossover rate, at which the projects' NPVs are equal. The slope of Project A's NPV profile is steeper. This indicates that Project A's NPV is more sensitive to changes in the discount rates. <span><body><html>


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