6. Understanding the NPV profile If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will agree. never Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. sometimes always Year Project Y Project 2 O -$1,500 -$1,500 1 $200 N $400 $900 $600 $300 w $600 A $1,000 $200 NPV (Dollars) 800 Project Y Project 2 -200 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) If the weighted average cost of capital (WACC) for each project is 10%, do the NPV and IRR methods agree or conflict? The methods agree. O The methods conflict. When there is a conflict, a key to resolving this it is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash a) modified internal rate of return (MIRR) b) required rate of return c) internal rate of return (IRR) flows are reinvested at the , and the IRR calculation assumes that the rate at which cash flows can be reinvested is the a) modified internal rate of return (MIRR) b) required rate of return c) internal rate of return (IRR) As a result, when evaluating mutually exclusive projects, the is usually the better decision criterion. a) IRR method b) NPV method