The net present value method assumes that the cash flows over the life of the project are reinvested at:

Question

Quizplus · Accepted Answer

The net present value method assumes that the cash flows over the life of the project are reinvested at the firm's cost of capital. This is the appropriate assumption because the cost of capital represents the required rate of return for the firm's investors, and therefore is the cost of obtaining the funds necessary to undertake the project. By assuming that cash flows are reinvested at this rate, the net present value method takes into account the opportunity cost of using these funds for the project rather than in alternative investments that would offer the firm's investors the same return.

The Net Present Value Method Assumes That the Cash Flows