Net present value (NPV) assumes that intermediate cash inflows are reinvested at the cost of capital, whereas internal rate of return (IRR) assumes that intermediate cash inflows can be reinvested at a rate equal to the project's IRR.

Question

Quizplus · Accepted Answer

This statement is true. NPV assumes that any intermediate cash inflows from a project will be reinvested at the cost of capital, which is the minimum required rate of return for an investment to be worthwhile. On the other hand, IRR assumes that all intermediate cash inflows can be reinvested at the same internal rate of return, which is the discount rate that results in a net present value of zero for the project.

Net Present Value (NPV) Assumes That Intermediate Cash Inflows Are