Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

IV. Capital Budgeting 9. Net Present Value and

Other Investment Criteria

(^322) © The McGraw−Hill
Companies, 2002
To find the IRR on this project, we can calculate the NPV at various rates:
The NPV appears to be behaving in a very peculiar fashion here. First, as the dis-
count rate increases from 0 percent to 30 percent, the NPV starts out negative and be-
comes positive. This seems backwards because the NPV is rising as the discount rate
rises. It then starts getting smaller and becomes negative again. What’s the IRR? To find
out, we draw the NPV profile as shown in Figure 9.7.
In Figure 9.7, notice that the NPV is zero when the discount rate is 25 percent, so this
is the IRR. Or is it? The NPV is also zero at 33^1 ⁄ 3 percent. Which of these is correct? The
answer is both or neither; more precisely, there is no unambiguously correct answer.
Discount Rate NPV
0%
$5.00
10%
1.74
20%
0.28
30% 0.06
40%
0.31
292 PART FOUR Capital Budgeting

FIGURE 9.7

NPV Profile

10 20 30 40 50

NPV ($)

2

1

0

–1

–2

–3

–4

–5

R (%)

IRR = 25% IRR = 33 %^1 – 3