Which of the following statements is correct?
A)One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project's full life whereas IRR does not.
B)One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more likely to be appropriate.
C)One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project's full life whereas MIRR does not.
D)One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.

Question

Quizplus · Accepted Answer

NPV assumes that cash flows are reinvested at the WACC, which is generally considered more appropriate than assuming they are reinvested at the IRR (as in the case of IRR). This is because the WACC represents the cost of capital and reflects the opportunity cost of investing in the project. In contrast, IRR assumes that all cash flows are reinvested at the same rate of return as the project, which is not always a realistic assumption. The other options (A and C) are incorrect as they are repeating the same advantage of NPV over two different methods (IRR in A and MIRR in C), while option D is incorrect as NPV also discounts cash flows, just like the MIRR method.

Which of the Following Statements Is Correct