Assignment 11- The Basics of Capital Budgeting Projects W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV IDollars) Year Project W Project X 800 -$1,500 C -$1,000 $200 1 $350 600 Project X 2 $350 $500 3 $400 $600 400 $600 4 $750 Project W 200 If the weighted average cost of capital (WACC) for each project is 18%, do the NPV and IRR methods agree or conflict? The methods conflict. The methods agree. -200 0 2 4 6 8 10 12 14 16 18 20 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 NP calculation implicitly assumes is usually the better decision criterion. As a result, when evaluating mutually exclusive projects, the