The underlying cause of the NPV versus IRR conflicts on mutually exclusive proje

Question

The underlying cause of the NPV versus IRR conflicts on mutually exclusive projects is different reinvestment rate assumptions. Which statement below is true?

a. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the average accounting return.

b. The NPV method assumes that cash flows will be reinvested at the average accounting return while the IRR method assumes reinvestment at the cost of capital.

c. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the internal rate of return.

d. The NPV method assumes that cash flows will be reinvested at the average accounting return while the IRR method assumes reinvestment at the internal rate of return.

Explanation / Answer

The underlying cause of the NPV versus IRR conflicts on mutually exclusive projects is different reinvestment rate assumptions. Which statement below is true?

c. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the internal rate of return.

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