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:

Trial Balance

A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal.

Loan Requests

Loan requests involve applying for a specified amount of money from a lender, which the borrower agrees to repay with interest over a predetermined period.

Financial Statements

Formal records of the financial activities and position of a business, individual, or other entity, presented in a structured manner.

Adjusted Trial Balance

A list of all the accounts and their final balances after adjustments, used to prepare financial statements.