Why Do the NPV Method and the IRR Method Sometimes

question 6

Multiple Choice

Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects?

• A)The NPV method does not assume reinvestment of cash flows, while the IRR method assumes the cash flows will be reinvested at the internal rate of return.
• B)The NPV method assumes a reinvestment rate equal to the discount rate, while the IRR method assumes a reinvestment rate equal to the internal rate of return.
• C)The IRR method does not assume reinvestment of the cash flows, while the NPV method assumes the reinvestment rate is equal to the discount rate.
• D)The NPV method assumes a reinvestment rate equal to the bank loan interest rate, while the IRR method assumes a reinvestment rate equal to the discount rate.

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Definitions:

Discount Rate

The rate of interest that central banks impose on credits extended to commercial banks and other financial entities.

Reserve Requirements

Regulations set by central banks determining the minimum amount of reserves that must be held by a commercial bank, a repeat of the Fed's specific requirement but applicable globally.

Depository Institutions Deregulation

The legislative measures taken to reduce regulation over banks and other depository institutions to enhance their ability to compete and innovate.

Monetary Control Act

A law intended to regulate banking and manage the money supply, possibly referring to specific legislation like the Monetary Control Act of 1980 in the United States, which influenced the Federal Reserve's control over monetary policy.