6. Understanding the NPV profile If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal rate of retum (IRR) methods agree. sometimesever/always Projects Yand Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV |Dollars] Year Project Y Project z $1,500$,500 $SDD 600 $300 $200 800 $200 $40D 600 4 $1,00D 600 Project Y 400 Project Z 200 If the for each project is 10%, do the NPV and IRR methods agree or weighted average cost of capital (WACC) conflict? O The methods conflict. O The methods agree. 200 0 2 4 8 10 12 14 1 18 20 COST OF CAPITAL (Percent modified intemal rat of return,required rate of return, internal rate of return when there is a confict, a key to resolving this it is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash lows are reinvested at the reinvested is the , and the NPV calculation implicidy assumes that the rate at which cash lows can be As a result, when evaluating mutually exclusive projects, the is usual ly the better dedision criterion. NPV m IRR method