The Basics of Capital Budgeting

6. Understanding the NPV profile 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 wil 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 0 $200 $400 $600 $1,000 $1,500 $1,500 $900 $600 $300 $200 600 Project Y 2 400 4 Project Z 200 If the weighted average cost of capital (WACC) for each project is 2%, do the NPV and IRR methods agree or conflict? -200 0 2 46 810 12 14 16 18 20 O The methods agree O The methods conflict. COST OF CAPITAL (Percent)