NPV profile

CFA Level I
#1

is going to be in the exam… Do you guys have few conceptual questions to throw here?

#2

this is definitely going to be on exam. its key. infact, 2-3 question on just N PV and IRR i htink and the questions are going to be very tricky on this concept. I came across one… it said if two projects have conflicting results, whats likely to happen: a) Cost of capital is equal to crossover b) cost of capital is less than crossover c) cost of capital is over crossover d) NPV profile is negative

#3

I am retracting from my choice

#4

C

#5

b) when the cost of capital is less then the crossover rate then the project with the higher IRR has a lower NPV

#6

The problem is you can get conflicting results depends on where you stand in the NPV profile. When the WACC = cross over rate, both of the projects going to give the same NPV.

#7

kochunni69 Wrote: ------------------------------------------------------- > The problem is you can get conflicting results > depends on where you stand in the NPV profile. > When the WACC = cross over rate, both of the > projects going to give the same NPV. you can only get conflicting results when the cost of capital is less then the cross over rate… otherwise when cost of capital is over the cross over rate the the project with the higher NPV also has the higher IRR – no conflict there

#8

Wow…Thanks. I was not getting the substance of that question. Thanks again.

#9

Wats the answer pepp i m tired of thinking!!

#10

its (B) i swear

#11

It’s a very tricky question and CharLee is right on this one. Kudos to him.

#12

I like the way he analyzed the problem.

#13

very useful question!

#14

hope this helps http://foba.lakeheadu.ca/hartviksen/2039/capital%20budgeting.ppt

#15

I had this to say in another thread: The only issue is when two mutually exclusive projects give conflicting results, where the high NPV is associated with the small IRR project. This is not an NPV conflict, it is an IRR conflict (important to know that). In such a case, you will find that the small IRR project will be the preferred project only when the cost of capital is less than the cross over rate (the rate at which the NPV’s are equal). So check your understanding: Assume IRR_1 < IRR_2, for two mutually exclusive projects. 1) If cost of capital > both IRR_1 and IRR_2, would there be an IRR conflict? 2) If cost of capital > both IRR_1 and less than IRR_2, would there be an IRR conflict? 3) If two projects are independent, would there be an IRR conflict?

#16

Dreary Wrote: ------------------------------------------------------- > Assume IRR_1 < IRR_2, for two mutually exclusive > projects. > > 1) If cost of capital > both IRR_1 and IRR_2, > would there be an IRR conflict? > > 2) If cost of capital > both IRR_1 and less than > IRR_2, would there be an IRR conflict? > > 3) If two projects are independent, would there be > an IRR conflict? 1)No. Reject both. 2)No. Accept 2 and reject 1. 3)No. Conflicts only happen in mutually exclusive situation.

#17

if two projects have conflicting results, whats likely to happen: a) Cost of capital is equal to crossover b) cost of capital is less than crossover c) cost of capital is over crossover d) NPV profile is negative I have Exactly same question in one of my practice paper…solution said “B”

#18

nice discusion guys.

#19

nice, cross over rate is where NPV of 2 projects are equal.

#20

just try to draw the NPV profile for two projects. its getting clear with a drawing.