Which of the Following Statements Is Correct About the Use

question 67

Multiple Choice

Which of the following statements is correct about the use of the net present value (NPV) method and the internal rate of return (IRR) method for capital budgeting decisions?

• A) The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment opportunity at the IRR.
• B) The NPV method assumes that cash flows will be reinvested at the risk-free rate while the IRR method assumes reinvestment at the required rate of return.
• C) The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the risk-free rate.
• D) The NPV method assumes that cash flows are not influenced by the inflation rate while the IRR method uses a rate of return after inflation adjustment.
• E) The NPV method assumes that the project generates no cash flows beyond the payback period while the IRR method assumes no cash flow in the first year of the life of a project.

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