Which of the following best describes the reinvestment assumptions implicit in t

Question

Which of the following best describes the reinvestment assumptions implicit in the internal rate of return (IRR) method and the net present value (NPV) method? Select one:

a. Both NPV and IRR assume cash flows are reinvested at the cost of capital.

b. NPV assumes cash flows are reinvested at the cost of capital, while IRR assumes reinvestment at the IRR.

c. IRR assumes cash flows are reinvested at the cost of capital, while NPV assumes reinvestment at the IRR Incorrect

d. Both NPV and IRR assume cash flows are reinvested at the IRR

e. None of the above describes the reinvestment assumptions used by NPV and IRR.

Explanation / Answer

The answer is option b.

NPV assumes cash flows are reinvested at the cost of capital, while IRR assumes reinvestment at the IRR.

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