7. 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 Wand X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. Year 0 Project w -$1,000 $200 $350 1 2 Project x -$1,500 $350 $500 $600 $750 3 $400 4 $600 NPV Dollars 00 Project Project atv R Ch 10: Assignment - The Basics of Capital Budgeting: Evaluating Cash Flows 400 Project w 200 0 -200 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL IPercent If the weighted average cost of capital (WACC) for each project is 6%, do the NPV and IRR methods agree or conflict? The methods agree. The methods conflict. A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the and the NPV calculation implicitly assumes that the rate at which cash flows can be reinvested is the As a result, when evaluating mutually exclusive projects, the is usually the better decision criterion