s. Understanding the NPV profile Aa Aa 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 W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV (Dollars) Year Project W Project x 800 0 - $1,500 -$1,000 $200 $350 600 Project X 2 $350 $500 $400 $600 400 4 $600 $750 Project W 200 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 46 8 10 12 14 16 18 20 O The methods conflict. O The methods agree. COST OF CAPITAL IPercent) A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that , and the IRR calculation intermediate cash flows are reinvested at the assumes that the rate at which cash flows can be reinvested is the earch 8 @G i If an independent project with conventional, or nomal, Cash flow agree. and internal rate of return (IRR) methods cash flows and NPV profiles are shown as follows. Projects W and X are mutually exclusive projects. Their NPV IDollars) Year Project W Project X 800 -$1,000 -$1,500 1 $200 $350 600 Project X $500 2 $350 3 $400 009$ $750 400 $600 Project W 200 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 conflict. O The methods agree. 0 24 6 8 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 ,and the IRR calculation intermediate cash flows are reinvested at the 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. earch