How do you calculate a crossover rate?

CFA Level I Corporate Finance
#1

EOC 13, Rno.44 Consider two projects with reqd rate of return = 10% Project 1 : - CF from year 0 to 4 are -100, 36,36,36,36 NPV 14.12 IRR 16.37% Project 2: CF from year 0 to 4 are -100, 0,0,0,175 NPV 19.53 IRR 15.02% What discount rate would result in same NPV for both projects? CFAI answer is 13.16(but much explanation in CFAI is not given) ne1 can help me with how to calculate cross over rate? Thanks

#2

calculate for a project with difference of the cashflows 0, 36, 36, 36, -139 that is your crossover rate.

#3

I see how you came up with the answer, but I don’t really understand the concept. A cross-over rate is the discount rate necessary for the 2 projects to have an equal npv? What exactly does that prove?

#4

when you have taken difference of the cash flows - you have equated the two projects. now find the irr of the 3rd (differenced) project. that is the rate that will make the npvs of the two equal.

#5

thanks cpk123. it was not in schweser. what does CP means?

#6

those are the initials on my name.

#7

Thank you!!! this was a big help 12 years later.