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:

Indifference Curve

A graphical representation showing different bundles of goods between which a consumer is indifferent, reflecting their preferences and utility.

Total Utility

The overall satisfaction or benefit a consumer receives from consuming a particular quantity of a good or service.

Indifference Curve

A graphical representation showing combinations of goods or services among which a consumer is indifferent, meaning they have no preference for one combination over another, holding utility constant.

Absolute Value

The non-negative value of a number without regard to its sign.