Which of the following statements is CORRECT?
A) One defect of the IRR method is that it does not take account of the time value of money.
B) One defect of the IRR method is that it does not take account of the cost of capital.
C) One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.
D) One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.
E) One defect of the IRR method is that it does not take account of cash flows over a project's full life.

Question

Quizplus · Accepted Answer

One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid. This is known as the reinvestment rate assumption, and it can lead to overestimating the true profitability of a project.

Which of the Following Statements Is CORRECT