The net present value method assumes that the cash flows over the life of the project are reinvested at
A)the computed internal rate of return
B)the risk-free rate
C)the market capitalization rate
D)the firm's cost of capital

Question

Quizplus · Accepted Answer

The net present value (NPV) method assumes that the cash flows over the life of the project are reinvested at the firm's cost of capital. This is because the cost of capital represents the opportunity cost of using the firm's funds, and therefore, is the required return that must be earned on the project in order to compensate investors for the risk of investing in the project. As such, the NPV method discounts the future cash flows of the project at the firm's cost of capital to determine the present value of the project, and compares this to the initial investment to determine whether the project is economically viable.

The Net Present Value Method Assumes That the Cash Flows