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