Why should I choose AnalystNotes?

AnalystNotes specializes in helping candidates pass. Period.

Subject 4. NPV Profiles

A NPV profile is a graph 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.

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.

Study notes from a previous year's CFA exam:

4. NPV Profiles