As the director of capital budgeting for Raleigh/Durham Company, you are evaluating two mutually exclusive projects with the following net cash flows: Is there a crossover point in the relevant part of a NPV profile graph (the northeast, or upper right, quadrant)?

Question

As the director of capital budgeting for Raleigh/Durham Company, you are evaluating two mutually exclusive projects with the following net cash flows:  Is there a crossover point in the relevant part of a NPV profile graph (the northeast, or upper right, quadrant)?

Quizplus · Accepted Answer

To determine if there is a crossover point in the relevant part of the NPV profile graph, we plot the net cash flows provided in the question against various discount rates.

At a discount rate of 7%, the NPV of project A is $998.78 and the NPV of project B is $1,004.67.

At lower discount rates than 7%, project A has a higher NPV than project B. At higher discount rates than 7%, project B has a higher NPV than project A. Therefore, we can conclude that there is a crossover point in the relevant part of the NPV profile graph at a discount rate of approximately 7%.

As the Director of Capital Budgeting for Raleigh/Durham Company, You