DISCOUNT RATE TO MAKE NPV OF 2 PROJECTS EQUAL(CROSSOVER RATE understand, everyone, problem

dvilayphet

Hey everyone,
can anyone help me to understand the problem # 13 in Corporate Finance, Page 30 of the curriculum and how did the answer for that is B..Thanks in advane…

Elliotbay

Actually it’s very simple.
In the same problem, you’re given the cashflows of the two projects. Take the difference of every two cashflows and input the difference as if it’s a new project. Calculate its IRR and that is your crossover rate.
This is how you solve the problem:
-100 - (-100) = 0 36 - 0 = 36 36 - 0 = 36 36 - 0 = 36 36 - 175 = -139
CF0 = 0
CF1 = 36
CF2 = 36
CF3 = 36
CF4 = -139
Solve for IRR. It will return 13.16%, which is the ratio provided by the key answer.

bigredhockey55

I don’t have the books, but don’t you just subtract the nominal values for each period of one project from the other to find the net pmt’s at each time period, then IRR it?  You know, just apply the following to the discount principles, making sure the timing lines up:
NPVa = NPVb
0 = NPVa - NPVb
0 = NPV (a - b)
Like I said I don’t have the books, but that’s all I remember about crossover rates..