Cross Over Rate

Cross-over Rate
• the discount rate that makes NPV of two
projects equal

• the interest rate at which you are indifferent

between two mutually exclusive projects
 IRR, NPV, and Mutually Exclusive Projects

Net present value $

160
140
120
Project A
100
80
60
40
Project B
20 NPV A >NPV B
0
– 20
– 40
– 60
NPV B >NPV A
– 80
– 100 Discount
0 2% 6% 10% 16% 20% 24% rate %

IRR A < IRR B

Crossover rate
 Cash Flow Pattern

Let us compare a decreasing cash-flow (D) project and

an increasing cash-flow (I) project.

NET CASH FLOWS

END OF YEAR Project D Project I
0 -$1,200 -$1,200
1 1,000 100
2 500 600
3 100 1,080
 Cash Flow Pattern

Calculate the IRR, NPV@10%, and

PI@10%.
Which project is preferred?
Project IRR NPV PI

D 23% $198 1.17

I 17% $198 1.17
 600 Examine NPV Profiles

Plot NPV for each

Net Present Value ($)

project at various
Project I discount rates.
400

NPV@10%
200

IRR

Project D
0
-200

0 5 10 15 20 25
Discount Rate (%)
 Fisher’s Rate of Intersection
600
Net Present Value ($)

At k<10%, I is best! Fisher’s Rate of

Intersection
-200 0 200 400

At k>10%, D is best!

0 5 10 15 20 25
Discount Rate ($)