I’m posting this for someone else who is having issues registering for the site. The NPV profiles of 2 projects will intersect if the projects have different: A. sizes and different lives B. IRRs and different lives C. IRRs and different costs of capital D. sizes and different costs of capital The answer is A. Now my understanding is that the NPV profiles of 2 projects intersect due to differences in the TIMING of cash flows, but this isn’t one of the answer options. Do the size of cash flows also matter? A small cash flow in year 2 for Project A would have a smaller present value in year 0 compared to a large cash flow in year 2 for Project B (assuming both projects have the same discount rate), and thus the NPV profiles of the 2 projects should intersect at some point? Do different sizes of projects imply different sizes of cash flows, and thus the NPV profiles intersect? Also, what does “different lives” mean, and how does this relate to NPV profiles intersecting? Do “different lives” mean differences in how long cash flows continue to flow, or different sizes of cash flows, or different patterns of cash flows?
Calculate NPV for both projects considering only year one cash flow without considering other year’s cash flows Calculate NPV for both projects considering only two years cash flows without considering other year’s cash flows Continue this calculation and plot NPV and IRR on a graph. You will see NPV and IRR for one of them will be lower in initial years and higher in later years. In order to go from lower to higher, it has to intersect at one point. Size difference - initial cash flow and subsequent cash flows difference between the two projects Lives - One project is longer than the other (cash flows may be or may not be different) If you are a CFA candidate, there are some examples in the CFA books (corporate finance). Hope it helps