Please explain the breakpoint of a project. Schweser note says: “Any given project’s NPV will decline when a breakpoint is reached.” & “An increase in the after-tax cost of debt may occur at a break point.” Please explain.
NPV will decline because the more capital you borrow the more the cost of capital will be. This has to do with Marginal cost of capital and the break points on the schedule. You have a higher hurdle rate to reach so NPV will be smaller due to the higher cost of capital.
thx
to add insult to injury: breakpoint is calculated as (amount of capital where component cost changes / weight of component in the WACC)