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7. Understanding the NPV profile If mutually exclusive projects with normal cash flows are being...

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Accounting

7. Understanding the NPV profile If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal rate of return (IRR) methods agree. Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. Year Project Y Project Z 0 $1,500 $1,500 1 $200 $900 2 $400 $600 3 $600 $300 4 $1,000 $200 If the weighted average cost of capital (WACC) for each project is 2%, do the NPV and IRR methods agree or conflict? The methods agree. The methods conflict. A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the , and

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