The net present value (NPV) method of investment project analysis assumes that the project's cash flows are reinvested at the:
A) Computed internal rate of return
B) Risk-free interest rate
C) Discount rate used in the NPV calculation
D) Firm's accounting rate of return

Question

Quizplus · Accepted Answer

The NPV method assumes that the project's cash flows are reinvested at the discount rate used in the NPV calculation. This is because the discount rate represents the opportunity cost of capital and is used to calculate the present value of future cash flows. Therefore, it is assumed that any cash flows generated by the project are reinvested at this same rate to generate additional value for the firm.

The Net Present Value (NPV) Method of Investment Project Analysis