7. Understanding conflicts between methods

If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal

rate of return (IRR) methods Sometimes, Always or Never agree.

A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the IRR, MIRR or Require Rate of Return, and the NPV calculation implicity assumes that the rate at which cash flows can be invested is the IRR, MIRR or Require Rate of Return.

As a result, when evaluating mutually exclusive projects, the NPV or IRR is usually the better decision criterion.