Understanding the NPV profile 1. 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. (never, always, sometimes) Projects Y and z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows.

2. If the weighted average cost of capital (WACC) for each project is 6%, do the NPV and IRR methods agree or conflict?

A. The methods conflict.

B. The methods agree.

3. A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the -----------------(MIRR, IRR, required rate of return), and the IRR calculation assumes that the rate at which cash flows can be reinvested is the ----------------------(MIRR, IRR, required rate of return).

As a result, when evaluating mutually exclusive projects, the -------------------(IRR method, or NPV method) is usually the better decision criterion.

5. Understanding the NPV profile 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 Y and z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follow:s NPV (Dollars) Year Project Y Project z 0 -$1,500 -$1, 500 $900 $600 $300 $200 800 $200 $400 $600 $1,000 600 Project Y 3 400 Project Z 200 If the weighted average cost of capital (WACC) for each project s 6%, do the NPV and IRR methods agree or conflict? -200 0 246 8 10 12 14 16 18 20 0 The methods conflict. 0 The methods agree COST OF CAPITAL (Percent) A key to resolving this conflict s the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the_________________ assumes that the rate at which cash flows can be reinvested is the and the IRR calculation As a result, when evaluating mutually exclusive projects, the is usually the better decision criterion