1.
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. If the
weighted average cost of capital (WACC) for each project is 6%, do the NPV and IRR methods
agree or 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 the NPV calculation
implicitly 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.
Solution
methods do agree.
intermediate cash flows are reinvested at the Internal Rate of Return , and ...............which cash
flows can be reinvested is the Cost of Capital .
exclusive projects, the NPV is usually the better decision criterion.