Which of the following statements is CORRECT?
A) The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.
B) The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.
C) The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.
D) The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.

Question

Quizplus · Accepted Answer

The NPV (Net Present Value) method assumes that interim cash flows are reinvested at the firm's weighted average cost of capital (WACC), while the IRR (Internal Rate of Return) method assumes that these cash flows are reinvested at the project's IRR. This difference in reinvestment assumptions can lead to different project evaluations under these two methods.

Which of the Following Statements Is CORRECT