Question

< Back to Assignment Do No Harm: /2 Attempts: 5. NPV profiles An NPV profile plots a project's NPV at various costs of capital, labeled "A" and "B" in the graph. A project's NPV profile is shown as follows. Identify the range of costs (ranges labeled "A" and "B") of capital that a firm would use to accept and reject this project NPV (Dollars) 400 300 A 200 100 0 -100 200 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) A True or False: The NPV and IRR methods can lead to conflicting decisions for mutually exclusive projects True False

Answer 1

A & B are the cost of Capitals in this NPV profile.

The value of A (i.e the range of cost of capital for the acceptance of the project) = 0% to 12%
[Below 12%]

The value of B (i.e the range of cost of capital for the rejection of the project) = 12% to 20%
[Above 12%]

True:
The NPV and IRR can lead to a conflicting decision because
1. The distribution of cash flow in the projects.
2. The size of the project.

Npv is a better technique then compared to the internal rate of return.
NPV absolute measure whereas IRR is a relative measure.
NPV gives absolute dollar returns.
IRR are reinvest the cash flow at IRR rate, which is not true and hence not a better technique.