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:

Cost Center

A division or department within a business that does not directly contribute to profit but incurs costs, used for budgeting and controlling expenses.

Level of Management

Refers to the hierarchy within an organization's structure, typically including top-level, middle-level, and lower-level management.

Direct Expense

Costs that can be directly traced to a product, service, or specific cost center, such as raw materials and labor.

Sales Commission Expense

A cost incurred by a company to compensate its sales staff, based on a percentage of the sales they achieve.