drop down 1 options: Internal rate of return, modified internal rate of return, or required rate of return

drop down 2 options: Internal rate of return, required rate of return, modified internal rate of return

drop down 3 options: NPV method, or IRR method

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 0 Project X -$1,500 $350 Project -$1,000 $200 $350 $400 $600 $500 N $600 w $750 present value (NPV) methods will not Is will agree. sometimes never always Project X NPV (Dollars) Project W -2000 2 4 16 18 20 6 8 10 12 14 COST OF CAPITAL (Percent) If the required rate of return for each project is 14%, 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