The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at ________.
A) the firm's discount rate, the internal rate of return
B) the internal rate of return, the internal rate of return
C) the internal rate of return, the firm's discount rate
D) neither criteria assumes reinvestment of future cash flows

Question

Quizplus · Accepted Answer

The NPV criteria assumes that expected future cash flows are reinvested at the firm's discount rate, which reflects the cost of capital for the firm. On the other hand, the IRR criteria assumes that expected future cash flows are reinvested at the internal rate of return, which is the rate at which the project's net present value equals zero.

The Net Present Value (Or NPV)criteria for Capital Budgeting Decisions