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

Question

Quizplus · Accepted Answer

The correct statement is that the NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes reinvestment at the IRR. This is because the NPV method discounts cash flows at the cost of capital, which is the required rate of return for the project, while the IRR method calculates the rate of return at which the project's cash inflows equal the initial investment, assuming reinvestment at the IRR.

Which of the Following Statements Is CORRECT