i was working on this problem and I found the NPV and the IRR but I dont know how to calculate the cross-over rate..can anyone tell me how to calculate a cross-over rate?
1. Consider the following cash flows from two mutually exclusive projects below:
Calculate the NPV and IRR of each project. Next, calculate the cross-over rate, or the discount where we are indifferent between the two projects (Fisher’s Intersection). Assume a discount rate of 10%. Which project would you recommend? Be sure to draw a graph to illustrate your answer.
Project Q Project P
The crossover rate is he discount rate at which the NPV of both contracts is the same.
Unless you feel like solving a cubic, you can use trial and error to find the crossover rate.
Alternatively (and equivalently) you could find the IRR of the following Hypothetical Project:
(Project Q) - (Project P) = 7000,-1000,-2800,-5150
When i did it i got 10.6%.