f mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal ate of return (IRR) methods agree. sometimes never always Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV (Dollars) 800 Year Project Y Project Z 0 -$1,500 - $1,500 1 $200 $900 600 Project Y 2. $400 $600 3 400 $600 $1,000 $300 $200 Project z 200 0 If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? -200 The methods agree. The methods conflict. 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 NPV (Dollars) 800 Year Project Y Project z 0 -$1,500 - $1,500 1 $200 $900 2 $400 $600 600 Project Y 3 $600 $300 400 4 $1,000 $200 Project Z 200 0 If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? -200 0 2 4 6 8 O The methods agree. O The methods conflict. 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 and the NPV calculation implicitly assumes that the rate at which cash required rate or return internal rate of return (IRR) As a result, when evaluating the CACTUSTVprojector modified internal rate of return (MIRR) is usually the better decision criterion. NPV (Dollars) 800 Year Project Y Project Z 0 - $1,500 - $1,500 1 $200 $900 2. $400 $600 600 PM 3 $300 400 $600 $1,000 4 $200 Projack 200 0 If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? The methods agree. The methods conflict. -200 0246 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 fiows are reinvested at the and the NPV calculation implicitly assumes that the rate at which cash flows can be reinvested is the internal rate of return (Irkey As a result, when evaluating mutually exclusive projects, modified internal rate of return (MIRR) ecision criterion. required rate of return NPV (Dollars) 800 Year Project Y Project z 0 -$1,500 -$1,500 1 $200 $900 600 Projed 2 $600 $400 $600 $1,000 200 A W $300 $200 Project 2 200 0 If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? -200 The methods agree. The methods conflict. 0 2 4 6 8 TO 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 and the NPV calculation implicitly assumes that the rate at which cash flows can be reinvested is the As a result, when evaluating mutually exclusive projects, the is usually the better decision criterion. NPV method IRR method
