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

$0$$$1,000$$$1,500$

$1$ $$200$ $$350$

$2$ $$350$ $$500$

$3$ $$400$ $$600$

$4$ $$600$ $$750$

If the weighted average cost of capital $($WACC$)$ for each project is $18\%,$ do the NPV and IRR methods agree or conflict?

The methods agree.

The methods conflict.

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.