Figure 151

NPV Profiles for the "Build New Plant" Versus "Remodel Old Plant" Investment Project Alternatives

Each profile relates project NPV to the discount rate used in the NPV calculation.

NPV (millions)

Interest rate

net present-value profile

Graph relating NPV to the discount rate crossover discount rate

Interest factor that equates NPV for two or more investments using the NPV criterion and a discount rate k that is less than the crossover discount rate. The "build new plant" alternative is preferred when using the NPV criterion and a discount rate k that is greater than the crossover discount rate. This ranking reversal problem is typical of situations in which investment projects differ greatly in terms of their underlying NPV profiles. Hence, a potentially troubling conflict exists between NPV, PI, and IRR methods.

Was this article helpful?

0 0
Your Retirement Planning Guide

Your Retirement Planning Guide

Don't Blame Us If You End Up Enjoying Your Retired Life Like None Of Your Other Retired Friends. Already Freaked-Out About Your Retirement? Not Having Any Idea As To How You Should Be Planning For It? Started To Doubt If Your Later Years Would Really Be As Golden As They Promised? Fret Not Right Guidance Is Just Around The Corner.

Get My Free Ebook


Post a comment