6. Understanding the NPV profile Aa Aa 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 follows NPV (Dollarsl Year Project Y Project z 0 -$1,500 -$1,500 $900 $600 $300 $200 800 $200 $400 $600 $1,000 600 Project Y 4 400 Project Z 200 If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? The methods conflict. O The methods agree 200 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent When there is a conflict, a key to resolving this it is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the reinvested is the , and the NPV calculation implicitly assumes that the rate at which cash flows can be As a result, when evaluating mutually exclusive projects, the is usually the better decision criterion