Which of the following statements is CORRECT?
A) The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.
B) The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.
C) The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
D) The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
E) The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.

Question

Quizplus · Accepted Answer

The NPV method assumes that cash flows will be reinvested at the discount rate, which is typically the company's WACC. On the other hand, the IRR method assumes that cash flows are reinvested at the IRR. Therefore, statement E is correct. Statements A and B are incorrect because both methods assume different reinvestment rates. Statements C and D are incorrect because both the NPV and IRR methods consider all relevant cash flows, including those beyond the payback period.

Which of the Following Statements Is CORRECT