In comparing two projects using an NPV proﬁle, at the point where the net present value of the projects involved are equal, ______________________.
A) The IRR of each is equal to zero.
B) The IRR of each is equal to the cost of capital.
C) The discount rate that equates them is called the crossover rate.
D) The projects both have NPVs equal to zero.
E) The AAR exceeds the cost of capital.

Question

Quizplus · Accepted Answer

The point where the net present value of the projects involved are equal is called the crossover rate, which is the discount rate that equates the NPVs of the two projects. At this rate, the cash flows of both projects are equal and therefore their NPVs are also equal. The IRR of each project may or may not be equal to the cost of capital or zero, and the AAR is not relevant in this comparison. Therefore, option C is the correct answer.

In Comparing Two Projects Using an NPV Proﬁle, at the Point