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. NPV (Dollars) 800 Year Project W Project X 0 -$1,000 -$1,500 1 $200 $350 600 Project X 2. $350 $500 3 $400 $600 400 4 $600 $750 Project W 200 0 If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? -200 The methods conflict. The methods agree. 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) 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. NPV method IRR method