If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal rate of return (IRR) methods agree. Projects W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV (Dollars) 800 Year Project W Project X 0 -$1,000 - $1,500 1 $200 $350 2 $350 $500 3 $400 $600 4 $600 $750 Project X Project W If the weighted average cost of capital (WACC) for each project is 10%, do the NPV and IRR methods agree or conflict? -200 0 2 4 6 8 O O The methods agree. 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 NPV calculation implicitly assumes that intermediate cash flows are reinvested at the , and the IRR calculation - 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