The reinvestment assumption is a downside of the internal rate of return method of analysis because it assumes that cash flows are reinvested at the cost of capital.
It actually assumes that cash flows are reinvested at the IRR rate, which can sometimes be excessively high, rendering this assumption unrealistic.

Question

Quizplus · Accepted Answer

The statement in the question is incorrect. The reinvestment assumption in the internal rate of return method assumes that cash flows are reinvested at the IRR rate, not the cost of capital. While this assumption may not always be realistic, it is a fundamental part of the IRR method of analysis.

The Reinvestment Assumption Is a Downside of the Internal Rate