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    Crossover rate: cost of capital two projects have the same NPV

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    I am considering 2 mutually exclusive projects. The projects have the following cash flows:

    Year X Cash Flow Y Cash Flow
    0 -10,000 -8,000
    1 1,000 7,000
    2 2,000 1,000
    3 6,000 1,000
    4 6,000 1,000
    At what cost of capital do the two projects have the same net present value? (That is, what is the crossover rate?)

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    Solution Preview

    The answer is in the attached Excel file.

    I am considering 2 mutually exclusive projects. The projects have the following cash flows:
    Year         X Cash Flow Y Cash Flow
    0 -10,000 -8,000
    1 1,000 7,000
    2 2,000 1,000
    3 6,000 1,000
    4 6,000 1,000
    At what cost of capital do the two projects have the same net present value? (That is, what is the crossover rate?)

    The crossover rate is the IRR of the cash flow obtained by subtracting one set of cash flows from the other

    Year         X Cash Flow Y Cash Flow Difference
    0 -10,000 -8,000 -2,000
    1 1,000 7,000 -6,000
    2 2,000 1,000 1,000
    3 6,000 1,000 5,000
    4 6,000 1,000 5,000

    IRR (Internal rate of return) is calculated using Excel ...

    Solution Summary

    Calculates the crossover rate- the cost of capital at which two projects have the same NPV

    $2.19

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