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Math Help - crossover rate

  1. #1
    Sep 2010

    crossover rate

    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
    -$1000 -$8000
    200 1200
    800 3600
    350 5500
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  2. #2
    MHF Contributor
    May 2010
    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%.
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