- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 5. Capital Investments and Capital Allocation
- Subject 2. Capital Allocation
CFA Practice Question
Which of the following statements is true?
A. The point where the net present value profile crosses the horizontal axis indicates a project's cost of capital.
B. The point where the net present value profile crosses the horizontal axis indicates a project's discounted payback period.
C. The point where the net present value profile crosses the horizontal axis indicates a project's internal rate of return.
Explanation: The point where the NPV profile crosses the horizontal axis indicates the cost of capital that makes the NPV equal to zero. That cost of capital is by definition the internal rate of return.
User Contributed Comments 4
| User | Comment |
|---|---|
| danlan | NPV profile=f(discount rate). |
| johans | I understand the correct answer, but i do not understand why A is incorrect. |
| julamo | A is wrong because the project's cost of capital can be anywhere, not only where the NPV profile crosses the horizontal axis |
| ksnider | So Juiamo, the point where the NPV crosses the horizontal access is one of the possible cost of capital points. Thus A would be right if it said that this point was "a 'possible'project's cost of capital"? |