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Identifying the crossover rate in the given case

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Using the table identify the "crossover point" AND briefly describe the significance when the crossover rate is greater than the cost of capital for mutually exclusive projects. Why is the IRR method less reliable when evaluating mutually exclusive projects?

Discount Rate(%) NPV of Project A NPV of Project B
0 100.00 280.00
5.00 77.30 202.81
10.00 58.49 138.88
15.00 42.75 85.35
20.00 29.44 40.08
21.86 25.00 25.00
25.00 18.08 1.47
25.21 17.65 0.00
30.00 8.31 -31.74
34.90 0.00 -60.00
35.00 -0.15 -60.52

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Solution Summary

The solution identifies the crossover point in the given case.

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Cross over point is the return/discount rate where NPV profiles of two projects intersect i.e. both projects have the same NPV. In the above case, NPV is 25 for both projects at 21.86%. Cross over point is 21.86% in the given case.

By knowing the crossover rate, when analyzing mutually exclusive projects, we can identify the discount ...

Solution provided by:
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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