Which of the following is TRUE of discounted cash flow methods like NPV and IRR?

Question

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Discounted cash flow methods like NPV and IRR assume that cash flows will be reinvested when received. This assumption allows for the time value of money to be factored into the analysis. Simple interest calculations are not used as these methods take compounding into account. They do not focus on the payback period but instead on calculating the present value of future cash flows. While following GAAP is important for accounting, it is not a requirement for using NPV and IRR.

Which of the Following Is TRUE of Discounted Cash Flow