Understanding the NPV profile

If an independent project with conventional, or normal, cash flows is being analyzed, the net present value $($NPV$)$ and internal rate of retum $($IRR$)$

methods

agree.

Projects $Y$ and $Z$ are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows.

If the weighted average cost of capital $($WACC$)$ for each project is $2\%,$ do the NPV and IRR methods agree or conflict?

The methods conflict.

The methods agree.

A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the

thi

$.$ and the NPV calculation implicitly assumes that the rate at which cash flows can be reinvested is

As a result, when evaluating mutually exclusive projects, the

is usually the better decision criterion.