How do you calculate a crossover rate?

crossover, discount, return, result, given

EOC 13, Rno.44

Consider two projects with reqd rate of return = 10%
Project 1 : -
CF from year 0 to 4 are -100, 36,36,36,36
NPV 14.12
IRR 16.37%

Project 2:
CF from year 0 to 4 are -100, 0,0,0,175
NPV 19.53
IRR 15.02%

What discount rate would result in same NPV for both projects?

CFAI answer is 13.16(but much explanation in CFAI is not given)

ne1 can help me with how to calculate cross over rate?

Thanks

kamara5

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2^#

发表于 2011-7-11 17:44 | 只看该作者

calculate for a project with difference of the cashflows

0, 36, 36, 36, -139

that is your crossover rate.

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disiz64

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3^#

发表于 2011-7-11 17:44 | 只看该作者

I see how you came up with the answer, but I don't really understand the concept. A cross-over rate is the discount rate necessary for the 2 projects to have an equal npv? What exactly does that prove?

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Ionutzakis

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4^#

发表于 2011-7-11 17:44 | 只看该作者

when you have taken difference of the cash flows - you have equated the two projects.
now find the irr of the 3rd (differenced) project.

that is the rate that will make the npvs of the two equal.

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shootingstar