Aa Aa If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will agree. Projects W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. Year Project W Project X NPV (Dollars) 0 -$1,000 -$1,500 800 1 $200 $350 2 $350 $500 600 Project X 3 $400 $600 4 $600 $750 400 Project W 200 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. 0 -200 0 2 468 10 12 14 16 18 20 COST OF CAPITAL (Percent) When there is a conflict, a key to resolving this it 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. IRR method NPV method