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 always agree. jects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV (Dollars) Year Project Y Project Z 0 $1,500$1,500 $900 $400 $600 $600 $300 $200 800 $200 600 Project Y 2 400 4 $1,000 Project Z 200 If the weighted average cost of capital (WACC) for each project is 10%, do the NPV and IRR methods agree or conflict? 200 O The methods conflict. O The methods agree. 0 2 468 10 12 14 16 18 20 COST OF CAPITAL IPercent) A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the assumes that the rate at which cash flows can be reinvested is the , and the IRR calculation As a result, when evaluating mutually exclusive projects, the NPV method is usually the better decision criterion