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 and are mutually exdusive projects. Their cash flows and NPV profiles are shown as follows. Year Project w Project -51.000 -$1.500 5200 $350 $350 5500 5500 3750 5500 NPV Dollars 800 600 Project LOO Project 200 0 -200 0 2 4 8 10.12 14 16 18 20 COST OF CAPITAL Percent If the weighted average cost of capital (WACC) for each project is 6%, do the NPV and IRR methods agree or conflich? 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 excursive projects, the is usually the better decision criterion