How to calculate a crossover rate

Written by richard jennings
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How to calculate a crossover rate
Calculating crossover rates can help you in making financial decisions. (Paying Bills image by ne_fall_photos from Fotolia.com)

Calculating a crossover rate can help you plan ahead when making certain business decisions. A crossover rate can help you determine how to manage your business investments in multiple securities, and it can also help you manage funding for projects and prepare reports for investor-relations documents. Most important, a crossover rate can be used to choose between different investment strategies, projects or securities, as it can be used to indicate which choice can be the most profitable for a business.

Skill level:
Moderate

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Things you need

  • Calculator
  • Cash-flow data for each project
  • Online IRR calculator
  • Paper and pencil

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Instructions

  1. 1

    Organise your cash-flow data from the two projects. Ensure that the periods match up and are of equal length.

  2. 2

    Calculate the differences in cash flow for each period between the first and second projects by subtracting each set of terms.

  3. 3

    Type these differences into either an IRR calculator available on the Internet, or the standard IRR formula: 0 = - outlay + DCF1/(1+r)^1 + DCF2/(1+r)^2 +(etc)+ DCFn/(1+r)n, where outlay stands for the initial investment, DCF1 stands for first difference in cash flow, and DCFn stands for the last cash-flow difference period.

  4. 4

    Press "Calculate" on the IRR calculator, or type the completed equation into a calculator and press "Enter."

  5. 5

    Round the generated value, which is either the output value of the online calculator or the term "r" in the formula. This will produce the crossover rate in terms of percentage.

Tips and warnings

  • Use the online calculator to save time and get a more accurate result.
  • Crossover rates should not be used in lieu of proper investment advice.

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