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If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internalrate of return (IRR) methodsagree.Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows.NPV (Dollars)Year Project Y Project Z800-$1,5000-$1,500$200$9001600Project Y$400$6002$600$300400$2004$1,000Project Z200If the weighted average cost of capital (WACC)0for each project is 6%, do the NPV and IRRmethods agree or conflict?-2000 2 4 6 8 10 12 14 16The methods agreeThe methods conflict18 20COST OF CAPITAL (Percent)A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes thatintermediate cash flows are reinvested at theand the IRR calculationassumes that the rate at which cash flows can be reinvested is theis usually the better decision criterion.As a result, when evaluating mutually exclusive projects, thest

Question
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.
NPV (Dollars)
Year Project Y Project Z
800
-$1,500
0
-$1,500
$200
$900
1
600
Project Y
$400
$600
2
$600
$300
400
$200
4
$1,000
Project Z
200
If the weighted average cost of capital (WACC)
0
for each project is 6%, do the NPV and IRR
methods agree or conflict?
-200
0 2 4 6 8 10 12 14 16
The methods agree
The methods conflict
18 20
COST OF CAPITAL (Percent)
A key to resolving this conflict 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
is usually the better decision criterion.
As a result, when evaluating mutually exclusive projects, the
st
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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. NPV (Dollars) Year Project Y Project Z 800 -$1,500 0 -$1,500 $200 $900 1 600 Project Y $400 $600 2 $600 $300 400 $200 4 $1,000 Project Z 200 If the weighted average cost of capital (WACC) 0 for each project is 6%, do the NPV and IRR methods agree or conflict? -200 0 2 4 6 8 10 12 14 16 The methods agree The methods conflict 18 20 COST OF CAPITAL (Percent) A key to resolving this conflict 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 is usually the better decision criterion. As a result, when evaluating mutually exclusive projects, the st

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Step 1

Net Present Value (NPV) is the method by which an investor accepts or reject the project by calculating the difference between future net cash inflows and cash outflows.

Step 2

In mutually exclusive projects, the value of IRR and NPV sometimes agree.

Step 3

The method conflicts as the time value of money is considered in net pre...

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