What is the internal rate of return's assumption about how cash flows are reinvested?
A) They are reinvested at the firm's discount rate.
B) They are reinvested at the required rate of return.
C) They are reinvested at the project's internal rate of return.
D) They are only reinvested at the end of the project.

Question

Quizplus · Accepted Answer

The internal rate of return assumes that cash flows generated by a project are reinvested at the project's internal rate of return. This means that the project is expected to generate a return that is at least as high as its own internal rate of return, which is a measure of the project's profitability. Therefore, the assumption is that cash flows will be reinvested at a rate that is at least equal to the project's own rate of return.

What Is the Internal Rate of Return's Assumption About How