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 W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows.

Year	Project W	Project X
0	$1,000	$1,500
1	$200	$350
2	$350	$500
3	$400	$600
4	$600	$750

If the weighted average cost of capital (WACC) for each project is 6%, do the NPV and IRR methods agree or conflict?

The methods conflict.

The methods agree.

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.

NPV (Dollars) Project X Project W -200 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent)