I thought cross over rate is a discount rate which the NPVs of both (if 2) projects would be the same right? Now, With regard to the net present value (NPV) profiles of the two projects , the crossover ratre is best described as the discount rate at whioch A two projects have the same NPV B two projects have the same internal rate of return. C a projects’ NPV changes from positive to negative. D a projects’ NPC changes frm mnegative to positive. Qn: The answer is A. Agreed but why not B as well?
the crossover rate is the rate that makes the NPV = 0 IRR = Discount Rate (Won’t make any money on the project) A Is correct, cause both will be zero.
Isn’t IRR similar to the slope of each projects NPV profile, so at the crossover rate the slopes are equal but the IRR must be different? Thats how I remember this.
just because the two projects have the same NPV doesn’t mean they both have to be 0 at the crossover rate. the crossover rate could be like 5% but they each cross the x-axis (NPV=0) at different IRRs
agreed. The NPV doesn’t HAVE to be zero, but the IRR will equal the Discount rate Correct?
beingthatguy Wrote: ------------------------------------------------------- > the crossover rate is the rate that makes the NPV > = 0 I think same NPV (not necessarily zero) > > IRR = Discount Rate (Won’t make any money on the > project) Look at the curve. When they intersect, at “a” point (cross over rate). Your Y-axis, IRR has be equal right? Atleast from the graph perspective. Intuitively, the rate which equates the NPV to 0 for both the projects is same. right? Am I misunderstanding the whole thing? > > A Is correct, cause both will be zero. ??? I am not sure if the NPV will be zero at intersection. Clarify…
doesnt need to be zero, my bad “The cross over rate is the discount rate wt which the NPV profile for two projects cros; the only point the NPV of the projects are the same” - CFA text I got mixed up, Vertical - Discount rate equal to zero Horizontal - NPV of zero
I mean X- axis… correctiing my prior post.