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 Y and Z are mutually exclusive projects. Their cash flows and NPV protiles are shown as follows NPV /Dolars 800 Year Project Y Project Z 0 $1,500 1,500 $200 $900 $400 $600 $600 $300 4 $1,000 $200 600 ProjectY 400 Project If the weighted average cost of capital (WACC) for each project is 10%, do the NPV and IRR methods agree or conflict? z410 12 1416182 COST OF CAPITAL Percent O The methods agree. O The methods conflict this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that , and the IRR calculation intermediate cash flows are reinvested at the assumes that the rate at which cash flows can be reinvested is the As a result, when evaluating mutually exclusive projects, the is usualy the better decision criterion