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) 800 Year Project Y Project Z 0 -$1,500 -$1,500 1 $200 $900 2 $400 $600 $600 $300 4 $1,000 $200 Project Y Project 2 If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? -200 0 2 4 6 8 The methods conflict. The methods agree. 10 12 14 16 18 20 COST OF CAPITAL (Percent) 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.

Answer 1

1) sometimes agree

2)

Year Project Y Project Z 0 $ (1,500.00) $ (1,500.00) 1 $ 200.00 $ 900.00 2 $ 400.00 $ 600.00 3 $ 600.00 $ 300.00 4 $ 1.000.00 $ 200.00 IRR 13.49% 11.79% NPV $ (19.71) $ 72.06

The methods conflict

3)

IRR, required rate of return

4)

NPV