On a purely theoretical basis, NPV is a better approach to capital budgeting than IRR because IRR implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.

Question

Quizplus · Accepted Answer

The statement is incorrect because IRR assumes that intermediate cash inflows are reinvested at the IRR itself, not at the firm's cost of capital.

On a Purely Theoretical Basis, NPV Is a Better Approach