Question
A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the (Internal rate
A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the (Internal rate of return - IRR, Modified internal rate of return - MIRR, OR required rate of return), and the NPV calculation implicitly assumes that the rate at which cash flows can be reinvested is the (Internal rate of return - IRR, Modified internal rate of return - MIRR, OR required rate of return).
As a result, when evaluating mutually exclusive projects, the (IRR method OR NPV method) is usually the better decision criterion.
7. 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 sometimes Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows always never Year Project Y Project Z -$1,500 $200 $400 $600 $1,000 -$1,500 $900 $600 $300 $200 4Step by Step Solution
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