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e NPV profile intersects the horizontal axi

e NPV profile intersects the horizontal axi

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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### 5. NPV profiles An NPV profile plots a project’s NPV at various costs of capital, labeled "A" and "B" in the graph. A project’s NPV profile is shown as follows. Identify the range of costs (ranges labeled "A" and "B") of capital that a firm would use to accept and reject this project. #### Graph Explanation: The graph displays the Net Present Value (NPV) in dollars on the vertical axis and the Cost of Capital (percent) on the horizontal axis. The NPV values range from -200 to 400 dollars, while the cost of capital varies from 0 to 20 percent. - **Section A:** The region where the NPV is positive. This section of the NPV profile indicates the range of costs of capital for which the project is expected to be profitable, that is, when the NPV is above zero. - **Section B:** The region where the NPV becomes negative. This section depicts the range of costs of capital where the project is not expected to be profitable, as the NPV falls below zero. #### Graph Analysis: - The NPV starts at around 400 dollars at a 0% cost of capital and declines linearly as the cost of capital increases. - The profile intersects the horizontal axis (NPV = 0) at approximately 10%. This is a crucial point and typically represents the project's Internal Rate of Return (IRR). Beyond this point, the NPV becomes negative. - The section labeled "A" covers the cost of capital from 0% to about 10%. - The section labeled "B" covers the cost of capital from about 10% to 20%. #### Understanding the Points: - **A**: Indicating the range of the cost of capital from 0% to the IRR (approx. 10%) where the project is accepted. - **B**: Indicating the range of the cost of capital from the IRR (approx. 10%) to 20%, where the project is rejected. The point at which the NPV profile intersects the horizontal axis represents the **Internal Rate of Return (IRR)**. --- Please fill in the following: - **A:** __________ - **B:** __________ The point at which the NPV profile intersects the horizontal axis represents the **________**. ### Answers: - **A:** 0% to approximately 10% - **
Transcribed Image Text:### 5. NPV profiles An NPV profile plots a project’s NPV at various costs of capital, labeled "A" and "B" in the graph. A project’s NPV profile is shown as follows. Identify the range of costs (ranges labeled "A" and "B") of capital that a firm would use to accept and reject this project. #### Graph Explanation: The graph displays the Net Present Value (NPV) in dollars on the vertical axis and the Cost of Capital (percent) on the horizontal axis. The NPV values range from -200 to 400 dollars, while the cost of capital varies from 0 to 20 percent. - **Section A:** The region where the NPV is positive. This section of the NPV profile indicates the range of costs of capital for which the project is expected to be profitable, that is, when the NPV is above zero. - **Section B:** The region where the NPV becomes negative. This section depicts the range of costs of capital where the project is not expected to be profitable, as the NPV falls below zero. #### Graph Analysis: - The NPV starts at around 400 dollars at a 0% cost of capital and declines linearly as the cost of capital increases. - The profile intersects the horizontal axis (NPV = 0) at approximately 10%. This is a crucial point and typically represents the project's Internal Rate of Return (IRR). Beyond this point, the NPV becomes negative. - The section labeled "A" covers the cost of capital from 0% to about 10%. - The section labeled "B" covers the cost of capital from about 10% to 20%. #### Understanding the Points: - **A**: Indicating the range of the cost of capital from 0% to the IRR (approx. 10%) where the project is accepted. - **B**: Indicating the range of the cost of capital from the IRR (approx. 10%) to 20%, where the project is rejected. The point at which the NPV profile intersects the horizontal axis represents the **Internal Rate of Return (IRR)**. --- Please fill in the following: - **A:** __________ - **B:** __________ The point at which the NPV profile intersects the horizontal axis represents the **________**. ### Answers: - **A:** 0% to approximately 10% - **
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