Figure 15.1 displays the potential conflict between NPV, PI, and IRR project rankings at various interest rates by showing the effect of discount rate changes on the NPV of each alternative investment project. This net present-value profile relates the NPV for each project to the discount rate used in the NPV calculation. Using a k = 0 percent discount rate, the NPV for the "build new plant" investment project is $38.4 million, and it is $42.1 million for the "remodel old plant" alternative. These NPV values correspond to the difference between nominal dollar cash inflows and outflows for each project and also coincide with NPV line Y-axis intercepts of $38.4 million for the "build new plant" project and $42.1 million for the "remodel old plant" alternative. The X-axis intercept for each curve occurs at the discount rate where NPV = 0 for each project. Becaise NPV = 0 when the discount rate is set equal to the IRR, or when IRR = k, the X-axis intercept for the "build new plant" alternative is at the IRR = 25.06 percent level, and it is at the IRR = 23.57 percent level for the "remodel old plant" alternative.
Figure 15.1 illustrates how ranking reversals can occur at various NPV discount rates. Given higher nominal dollar returns and, therefore, a higher Y-axis intercept, the "remodel old plant" alternative is preferred when very low discount rates are used in the NPV calculation. Given a higher IRR and, therefore, a higher X-axis intercept, the "build new plant" alternative is preferred when very high discount rates are used in the calculation of NPV. Between very high and low discount rates is an interest rate where NPV is the same for both projects. A reversal of project rankings occurs at the crossover discount rate, where NPV is equal for two or more investment alternatives. In this example, the "remodel old plant" alternative is preferred when
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