1If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal rate of return (IRR) methods sometimes agree. Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV (Dollars) 800 600 Year Project Y Project Z 0 -$1,500 -$1,500 1 $200 $900 2 $400 $600 3 $600 $300 4 $1,000 $200 Project Y 400 Project 2 200 0 2 If the weighted average cost of capital (WACC) for each project is 6%, do the NPV and IRR methods agree or conflict? The methods agree. The methods conflict. -200 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the 3 required rate of return , and the IRR calculation assumes that the rate at which cash flows can be reinvested is the 4 internal rate of return (IRR) As a result, when evaluating mutually exclusive projects, the 5 NPV method is usually the better decision criterion