6. Understanding the NPV profile It mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal rate of return (IRR) methods agree Projects Wand X are matuwly exclusive projects. The cash flows and NPV profiles are shown as follows. Year D Project w $1,000 5200 $350 Project x $1.500 $350 1 2 5500 3600 3 5400 4 $600 $750 NPV Dersi 330 000 Prat Project 200 02 E102 14 16 18 20 COST OF CAPITALIPER of the weighted average cost of capital (WACC) for each projectes 10%, do the NPV and IRA methods agree or conflict? The methods agree The methods conflict When there is a conflict, a key to resolving that is the assumed reinvestment rate, The NPV calculation implicitly assumes that intermediate cash How are revested at the and the IRR calculation assumes that the rate at which cash flows can be reinvested is the As a result, when evaluating mutually exdusive projects, the is usually the better decision criterion Grade