6. Understanding the NPV profile If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and Internal rate of return (IRR) methods agree Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. Year 0 1 Project Y Project 2 -$1,500 -$1,500 $200 $900 5400 5600 $600 $300 $1,000 $200 2 3 4 NPV Dollars 800 600 Project 400 Project 2 200 0 200 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL I Percent If the weighted average cost of capital (WACC) for each project is 2%, do the NPV and IRR methods agree or conflict? The methods conflict. The methods agree When there is a conflict, a key to resolving this it is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash Nows are reinvested at the and the IRR calculation assumes that the rate at which cash nows can be reinvested is the . is usually the better decision criterion As a result, when evaluating mutually exclusive projects, the