The NPV method's assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This makes the NPV method preferable to the IRR method.

Question

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The assumption that cash inflows are reinvested at the cost of capital is more reasonable because it reflects the opportunity cost of investing in the project rather than assuming that the cash flows can be reinvested at a higher rate of return. Therefore, the NPV method is preferable to the IRR method.

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