Understanding the NPV Profile

1. If an independent project with conventional, or normal cash flows is being analyzed, the net present value (NPV) & internal rate of return (IRR) methods _______ agree.

A. Always

B. Never

C. Sometime

Projects W & X are mutually exclusive projects. Their cash flows & NPV profiles are shown as follows:

Year	Project W	Project X
0	$-1,500	$-1,500
1	$200	$900
2	$350	$600
3	$600	$300
4	$1000	$200

2. If the required rate of return for each project is 2%, do the NPV & IRR methods agree or conflict?

A. The methods agree

B. The methods conflict

A Key to resolving this conflict is the assumed reinvestment rate.

3. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the?

A. Modified rate of return (MIRR)

B. Required rate of return

C. Internal rate of return (IRR)

4. The IRR calculation assumes that the rate at which cash flows can be reinvested is the?

A. Modified rate of return (MIRR)

B. Required rate of return

C. Internal rate of return (IRR)

5. As a result, when evaluating mutually exclusives projects, the ________ is usually the better decision criterion.

A. IRR method

B. NPV method