The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR.This is an important reason why the NPV method is generally preferred over the IRR method.

Question

Quizplus · Accepted Answer

The NPV method assumes that cash inflows are reinvested at the cost of capital, which is a more reasonable assumption than the IRR method's assumption that cash flows are reinvested at the IRR. This is because the cost of capital represents the opportunity cost of investing in a project, while the IRR only measures the return on investment. Therefore, the NPV method is generally preferred over the IRR method.

The NPV Method's Assumption That Cash Inflows Are Reinvested at the Cost