CFA Practice Question

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CFA Practice Question

Given two mutually exclusive projects with normal cash flows, the points at which the net present value profiles intersect the horizontal axis are most likely to be the ______.
A. crossover rate for the projects
B. internal rates of return of the projects
C. company's weighted average cost of capital (WACC)
Explanation: For a project with normal cash flows, the NPV profile intersects the horizontal axis at the point where the discount rate is equal to the IRR. The crossover rate is the discount rate at which the NPVs of the projects are equal. While it is possible that the crossover rate is equal to each project's IRR, it is not a likely event. The IRR for both projects being the firm's WACC will only arise when both projects have a NPV = 0.

User Contributed Comments 1

User Comment
farhan92 dammit i read intersect and assumed it was crossover -.-
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