What is the crossrate? How does it relate to the cost of capital with respect to IRR and NPV decisions?
Yeah I got this question on one of the CFAI exams. Didn’t know what was meant by crossrate.
There is a chart where a couple of the NPV and IRR lines intersect. It is in the middle of the Corp Fin section NPV1, IRR1 NPV2, IRR2 two lines with a graph between NPV on Y and IRR on X The place where these two lines intersect is the Cross Over Rate. Typically NPV1 is High, IRR1 is Low NPV2 is Low, IRR2 is High so you have an intersection. and then there is an interpretation of the same… (which somehow never sticks, and I cannot recall it right now)
If you have IRR1 = 13% and IRR2 = 17% and they say the crossover rate [POINT OF INTERSECTION] is 10%, It means NPV of project with IRR1 is surely greater than NPV of project with IRR2… Think graphs here… it’s pretty simple (compare this to economics and be happy that they dont move/shift left/right) - Dinesh S
Must have something to do with the size of the project. That’s the only way to get disagreeing decisions on NPV vs IRR, with mutually exclusive projects of differing sizes. Never heard of cross rate terminology though.
saw it on a practice CFAI exam… brush up on it everyone!
the cross over rate is the rate at which two project of different sizes and different lifes have the same NPV. the cross over rate is given by different profiles of a project- where those intersect
I guess everybody hit the books
ahhhh i saw this question aswell… i just guessed that the crossover rate was the IRR at which NPV ‘crossed’ the axis from positive to negative (ie, the rate at which NPV = zero)…