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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
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 Projects W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows NPV (Dollars) Year Project W Project X 0-$1,000-$1,500 $350 $500 $600 $750 800 $200 $350 $400 $600 600 Project X 2 400 4 Project W 200 If the weighted average cost of capital (WACC) for each project is 1496, do the NPV and IRR methods agree or conflict? -200 O The methods agree O 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 flows are reinvested at the that the rate at which cash flows can be reinvested is the , and the NPV calculation implicitly assumes As a result, when evaluating mutually exclusive projects, the is usually the better decision criterion
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