3/28/2024 0 Comments Crossover definitionIf second project has initial investment B and its cash flows are CF i and CF ii, its net present value equation would look like: NPV 2 = Formula and CalculationĪssume first project has initial investment A and its cash flows at end of year 1, 2 and 3 are CF 1, CF 2 and CF 3, we can develop its net present value equation as follows: NPV 1 = if Project A is preferable at a discount rate below the crossover rate, Project B becomes feasible as soon as the cost of capital crosses the crossover rate. If the company's cost of capital crosses the crossover rate, the relative attractiveness of mutually-exclusive projects changes i.e. It is the point at which the NPV profile of one project crosses over (intersects) the NPV profile of the other project.Ĭrossover rate is useful in capital budgeting analysis because it tells the investing company about the cost of capital at which both of the mutually-exclusive projects are equally good. Crossover rate is the cost of capital at which the net present values of two projects are equal.
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