Although differences in the magnitude and timing of cash flows explain conflicting rankings under the NPV and IRR techniques, the underlying cause is the implicit assumption concerning the reinvestment of intermediate cash inflows cash inflows received prior to the termination of a project.

Question

Quizplus · Accepted Answer

The statement is true. The NPV assumes that all cash inflows are reinvested at the required rate of return, while the IRR assumes that cash inflows are reinvested at the IRR itself. This difference can lead to conflicting rankings of projects with different cash flow profiles.

Although Differences in the Magnitude and Timing of Cash Flows