7. Understanding the NPV profile If mutually exclusive projects with normal cash flows are being analyzed, the nat present value (NPV) and internal rate of return (IRR) methods agree Projects Y and Z are mutually endutive projects. Their cash flows and NPV profiles are shown as follows. Year Project Y Project z 0 -$1,500 $1,500 1 $200 $900 2 $400 3 5600 $300 4 $1,000 $200 NPV Dolors BE LE Project LE Project 2 200 1 2 6 10 12 14 16 18 20 COST OF CAPITAL I Percent of the weighted average cost of capital (WACC) for each project is 6%, do the New and INR methods agree or conflict? The methods conflict. The methods are A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assume that intermediate cash flows are reinvested at the and the NPV calculation implicitly assume 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