An NPV profile plots a project's NPV at various costs of capital. A project's NPV profile is shown as follows.

An NPV profile plots a project's NPV at various costs of capital. A project's NPV profile is shown as follows. Identify the range of costs of capital that a firm would use to accept and reject this project.

The point at which the NPV profile intersects the horizontal axis represents the _______ .

Expert Solution

NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Now, in capital budgeting decision making, a positive NPV is desirable and it is assumed to add value to the firm. In case of a negative NPV, it erodes the value of firm.

Now, in question above,

Green color area represent area of positive NPV - project can be ACCEPTED there

Purple color area represent area of negative NPV - project should be REJECTED there

the point at which the NPV profile intersects horizontal axis represented the IRR. Point of intersection is zero NPV and IRR is the cost of capital at which NPV is zero.

jeff jeffy answered 2 years ago

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