4. Understanding the NPV profile projects are mutually exclusive, only one project can be chosen. The internal rate of r

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4 Understanding The Npv Profile Projects Are Mutually Exclusive Only One Project Can Be Chosen The Internal Rate Of R 1 (105.49 KiB) Viewed 21 times

4. Understanding the NPV profile 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 will agree. Projects W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. Year Project W Project X 0 -$1,000 -$1,500 $350 $500 $600 $750 1 2 3 4 NPV (Dollars) 800 600 400 200 0 $200 $350 $400 $600 -200 Project X Project W 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) If the weighted average cost of capital (WACC) for each project is 18%, do the NPV and IRR methods agree or conflict? O The methods conflict. O The methods agree. When there is a conflict, key to resolving this it is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the and the IRR calculation 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.