If an independent project with conventional, or normal, cash flows is being analyzed, the net present value (NPV) and internal rate of return (IRR) methods agree Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV (Dollars Year Project Y Project Z 800 -$1,500 -$1,500 0 $200 $900 1 600 Project Y $400 $600 2 $600 $300 400 $1,000 $200 4 Project Z 200 If the weighted average cost of capital (WACC) 0 for each project is 14%, do the NPV and IRR methods agree or conflict? -200 2 8 10 12 14 16 18 20 The methods conflict. COST OF CAPITAL (Percent) The methods agree. A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash and the NPV calculation implicitly assumes flows are reinvested at the that the rate at which cash flows can be reinvested is the is usually the better decision criterion As a result, when evaluating mutually exclusive projects, the