Investment decisions
NPV profiles and the crossover rate
See how NPV changes with the discount rate, and find the rate at which two competing projects swap places.
20 minintermediateMembers
Learning objectives
- Build an NPV profile table with mixed references
- Find the crossover rate of two competing projects
- Explain why NPV and IRR can rank projects differently
An NPV profile plots a project's NPV against the discount rate. It starts at the undiscounted total (rate = 0%), falls as the rate rises, and crosses zero at the IRR.
When two projects compete, their profiles can cross. Below the crossover rate one project has the higher NPV; above it, the other does. That is exactly when NPV and IRR disagree — and why the cost of capital, not the IRR, should settle the choice.
Crossover rate = IRR of (cash flows of B − cash flows of A)
- Crossover rate
- the discount rate at which NPV(A) = NPV(B)
- B − A
- the incremental cash flows from choosing B instead of A, year by year
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.