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.
E) The IRR method does not consider all relevant cash flows,particularly cash flows beyond the payback period.

Question

Quizplus · Accepted Answer

The correct statement is that the NPV method assumes that cash flows will be reinvested at the WACC,while the IRR method assumes reinvestment at the IRR. This is because the NPV method discounts cash flows back to the present value using the WACC, which assumes that any cash flows received can be reinvested at the WACC. On the other hand, the IRR method calculates the rate of return that equates the present value of cash inflows with the initial investment, therefore assumes that cash flows can be reinvested at the IRR.

Which of the Following Statements Is CORRECT