The net present value method assumes that the cash flows over the life of the project are reinvested at the ____.
A) computed internal rate of return
B) risk-free rate
C) market capitalization rate
D) firm's cost of capital

Question

Quizplus · Accepted Answer

The net present value (NPV) method assumes that the cash flows generated during the life of the project are reinvested at the firm's cost of capital. The cost of capital represents the opportunity cost of capital as it indicates the return that the investors could earn by investing their capital in a comparable investment with a similar level of risk. Thus, D is the correct choice. A, B, and C are not appropriate assumptions for the NPV method as they do not reflect the actual cost of capital or opportunity cost of the investors.

The Net Present Value Method Assumes That the Cash Flows