This document discusses net present value (NPV) profiles and how they can be used to analyze projects. It explains that an NPV profile is a graphical representation of a project's NPV over a range of discount rates. It can help resolve conflicting rankings of projects that occur when the discount rate changes. The document also discusses how the internal rate of return (IRR) is the discount rate that makes a project's NPV equal to zero, and how IRR and NPV can sometimes produce different accept/reject decisions for projects due to their different assumptions about reinvestment rates.

1. “Net Present Value(NPV)Profile”
Ramesh Pant
BBM-18
Fourth Semester

2. NPV Profile
• A net present value profile is a graphic representation
of the net present value of a project at various discount
rates.
• The net present value profile may be used when
conflicting rankings of projects exist by depicting each
project as a line on the profile and determining the
point of intersection.
• If the intersection occurs at a positive discount rate,
any discount rate below the intersection will cause
conflicting rankings, whereas any discount rates above
the intersection will provide consistent rankings.

3. • Conflicts in project rankings using NPV and IRR
result from differences in the magnitude and
timing of cash flows.
• Projects with similar-sized investments having
low early-year cash inflows tend to be preferred
at lower discount rates.
• At high discount rates, projects with the higher
early-year cash inflows are favored, as later-year
cash inflows tend to be severely penalized in
present value terms.

4. • The net present value profile allows for the
graphic representation of the net present
value of a project at different discount rates.
• Net present values are shown along the
vertical axis and discount rates are shown
along the horizontal axis.

5. NPV Profiles
Example: Draw the NPV profiles of the two projects. Show the values where
the NPV profiles intersect the vertical axis and the horizontal axis.

6. Internal Rate of Return (IRR)
• The internal rate of return (IRR) is that discount rate
that causes the NPV of the project to equal zero.
• If IRR > WACC, then the project is acceptable because
it will return a rate of return on invested capital that
is likely to be greater than the cost of funds used to
invest in the project.

7. IRR versus NPV
• Both methods use the same basic decision inputs.
• The only difference is the assumed discount rate.
• The IRR assumes intermediate cashflows are
reinvested at IRR…NPV assumes they are
reinvested at WACC
– This difference, however, can produce conflicting
decision results under specific conditions

8. Comparing NPV and IRR
• Both techniques use the same inputs
• NPV measures in absolute terms, the estimated increase in
the value of the firm today the project is expected to produce.
– NPV assumes cash flows are reinvested at WACC
• IRR estimates the rate of return on the project
– IRR assumes cash flows produced by the project are reinvested
by the firm at the project’s IRR.
The reason for the different accept/reject decisions is the
different reinvestment rate assumptions used by the two
techniques.