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6. 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 W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. Year Project X -$1,500 $350 Project W -$1,000 $200 $350 $400 $600 $500 $600 $750 NPV (Dollars) 800 600 Project X 400 Project W 200 -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 10%, do the NPV and IRR methods agree or conflict? O The methods agree. The methods conflict. A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at and the IRR calculation 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 required rate of return internal rate of return (IRR) modified internal rate of return (MIRR) Ak reinvestment rates The NPV calculation implicitly assumes that intermediate cash flows are reinvested at , and the IRR calculation 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. 0. Understanding the NPV profile If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and i agree. always x are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. sometimes never Project w -$1,000 $200 Project X $1,500 $350 1 If the weighted average cost of capital (WACC) for each project is 10%, do the NPV and IRR methods agree The methods agree. modified internal rate of return (MIRR) internal rate of return (IRR) required rate of return ned reinvestment rate. The NPV calculation implicitly assumes tha , and the IRR calculation assumes that the rate at whic As a result, when evaluating mutually exclusive projects, the is usually the better decisi Grade e weighted average cost of capital (WACC) for each project is 10%, do the NPV and IRR methods agree or ce The methods agree. The methods conflict. y to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that inter , and the NPV method in assumes that the rate at which cas! IRR method result, when evaluating mutually exclusive projects, the is usually the better decision crit