The reinvestment assumption is a downside of the IRR 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 reinvestment assumption of the IRR method assumes that cash flows are reinvested at the IRR rate, not at the cost of capital. This can be unrealistic if the IRR is excessively high.

The Reinvestment Assumption Is a Downside of the IRR Method