Since the cost of capital tends to be a reasonable estimate of the rate at which the firm could actually reinvest intermediate cash inflows, the use of NPV is in theory preferable to IRR.

Question

Quizplus · Accepted Answer

The statement is true. The cost of capital is the rate of return that a firm must earn on its invested capital to satisfy its investors, so it represents a reasonable estimate of the rate at which the company can reinvest intermediate cash inflows. In contrast, the Internal Rate of Return (IRR) assumes that all cash inflows from a project are reinvested at the same rate, which is not a realistic assumption. Therefore, NPV is considered to be a more accurate method for evaluating investment opportunities.

Since the Cost of Capital Tends to Be a Reasonable