Define each of the following terms: e. NPV profile; crossover rate
NPV PROFILE:
NPV(Net present value) profile is described as the values of net present value and the different discount rates of the company plotted on a graph. The vertical axis represents the net present value of the projects undertaken & the horizontal axis represents the discount rates.
NPV is calculated using the summation of the present value of cash flows. If the NPV is positive, it means that the present value of cash inflows is greater than the present value of cash outflows. Where NPV is zero, the present value of cash inflows is equal to the present value of cash outflows. The rate which causes the NPV to zero is called the internal rate of return. Where the NPV is negative, the present value of cash inflows is less than the present value of cash outflows.
Therefore, the relationship between the discount rate and NPV is inverse, meaning, a higher discount rate lower NPV and vice versa.
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