What is Crossover Rate?

In capital budgeting, the crossover rate is the cost of capital at which the net present values of two investments are equal. Graphically, it is the intersection of two NPV profiles for two projects. An NPV profile is the net present value of a project plotted against different discount rates.

When to use Crossover Rate?

An investor can use a crossover rate to compare the return on investments for two different projects over time. The es timation and calculation of crossovers allow the investor to become sure of profitability. Additionally, it assists in predicting the possibility of equal cashflows or returns from the two projects.

How to use Crossover Rate calculator?

Let’s assume that you have two projects (A and B) with their cash flows. Now you want to know at what cost of capital the two Net Present Value (NPV) profile lines cross each other. This is mainly to compare the profitability of two projects.

Number of Cash Flows:

From the dropdown box, select how many cash flows input boxes you want for your project. Let’s assume that your projects have 4 cash flows each. Therefore, select, 4 from the list.

Initial Investment:

This number is by default a negative number. What it means is that investment into the project is always a cash outflow (negative number) from you. In finance, investment is always defined as a negative number. You need to enter your initial investment amount for both Project A and B. Let’s enter - $1,000 and - $1,000 for A and B respectively.

Cash Flows:

Depending on the number of cash flow input boxes you selected, you need to enter all cash flows. For example, for project A, enter $500, $400, $300, and $100 and for project B, enter $100, $300, $400, and $765.
Once you entered all the numbers as stated above, click on “Calculate” button. The calculator will show you the crossover rate as 11.97%. This means that the Net Present Values (NPV) of Project A and B are equal at the cost of capital of 11.97% . Additionally,the calculator will show you a table with the differences in cash flows of two projects. If you use the crossover rate of 11.97%, the Net Present Value (NPV) of the cash flow differences will be zero as shown in the last row of the table.