Which of the Following Statements Is Correct About the Reinvestment

question 12

Multiple Choice

Which of the following statements is correct about the reinvestment assumptions that are inherent in the use of the net present value (NPV) method and the internal rate of return (IRR) method?

• A)The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the project's IRR.
• B)The NPV method assumes that the project's cash flows will be reinvested at the risk-free rate, whereas the IRR method assumes reinvestment at the firm's required rate of return.
• C)The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the risk-free rate.
• D)The NPV method assumes that the project's cash flows are not reinvested, whereas the IRR method assumes the cash flows are reinvested at the firm's required rate of return.
• E)The NPV method assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas the IRR method assumes the cash flows are not reinvested.

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Definitions:

FIFO Method

An inventory valuation method that assumes the first items placed in inventory are the first sold or used.

Process Costing

A costing method used in industries where production is continuous, allocating costs to products based on the process they go through.

Assembly Department

A segment of a manufacturing process where components are put together to assemble a final product.

Process Costing

An accounting methodology used for homogenous products, where costs are accumulated to produce an average cost per unit across the entire production process.