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 Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. Year 0 Project Y -$1,500 $200 Project 2 -$1,500 $900 $600 1 2 $400 3 $600 $300 4 $1,000 $200 NPV Dollars) 800 600 Project Y 400 Project 2 200 0 -200 0 2 4 6 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 conflict? The methods conflict. O 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