Question

In comparing two projects using an NPV profile, at the point where the net present value of the projects involved are equal, _____________________.

A) the IRR of each is equal to zero
B) the IRR of each is equal to the cost of capital
C) the discount rate that equates them is called the crossover rate
D) the projects both have NPVs equal to zero
E) the AAR exceeds the cost of capital

Answer 1

The point where the net present values of two projects are equal on an NPV profile option (d) is at the crossover rate, which is the discount rate where both projects' NPV curves intersect.

Step-by-step explanation:

In comparing two projects using an NPV profile, at the point where the net present value of the projects involved is equal, the discount rate that equates them is called the crossover rate. This means that if you graph the NPV of each project against various discount rates, the crossover rate is the specific discount rate at which the two NPV profiles intersect.

At this rate, the projects are considered to be equally desirable from a financial perspective. It's important to mention that this does not mean that the internal rate of return (IRR) for both projects is the same at this point, nor does it necessarily mean that the net present value (NPV) of both projects is zero at this rate.