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.