**Corporate Finance I**

**Reading 32. Capital Budgeting**

**Learning Outcome Statements**

e. explain the NPV profile, compare the NPV and IRR methods when evaluating independent and mutually exclusive projects, and describe the problems associated with each of the evaluation methods;

*CFA Curriculum, 2020, Volume 4*

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### Subject 4. NPV Profiles

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.

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**User Contributed Comments**
5

You need to log in first to add your comment. ###### poomie83

So when the npv crosses beyond the irr horizontal line does that mean npv is less than zero?

###### sagrr

yes, if you choose discount rate above (horizontally) where NPV crosses the horizontal axis, NPV will be less than zero. In this case, for example, for A, a discount rate above 11.8% would result in a negative NPV

###### bear1234

I was under the impression that NPV can not be less than zero

###### jonan203

bear1234 - NPV can be any positive or negative value, in practice a project which yields a NPV that is negative would not be selected

###### darnoor871

This was much easier to understand than the book. Straight forward and to the point.