6. Understanding the NPV profile Aa Aa If an independent project with conventional, or normal, cash flows is 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. NPV IDollars Year Project W ProjectX 0 $1,000 $1,500 $200 $350 $400 $600 800 $350 $500 $600 $750 600 Project X 400 Project W 200 If the weighte for each project is 10%r do the NPV and IRR methods agree or conflict? d average cost of capital (WACC) -200 0 2 481 12 4 16 18 20 O The methods conflict. O The methods agree. 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 that the rate at which cash flows can be reinvested is the , and the NPV calculation implicitly assumes As a result, when evaluating mutually exclusive projects, the is usually the better decision criterion