The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is ________.
A) the reinvestment rate assumption regarding intermediate cash flows
B) that neither method explicitly considers the time value of money
C) the assumption made by the IRR method that cash inflows are spread equally throughout the timeline
D) that NPV approach favors small projects with high returns

Question

Quizplus · Accepted Answer

The reinvestment rate assumption regarding intermediate cash flows differs between the internal rate of return (IRR) and net present value (NPV) methods. The IRR method assumes that intermediate cash flows are reinvested at the IRR itself, while the NPV method assumes that intermediate cash flows are reinvested at the firm's cost of capital. This difference in the reinvestment rate assumption can result in conflicting rankings for projects between the two methods.

The Underlying Cause of Conflicts in Ranking for Projects by Internal