The Reinvestment Assumption Is a Downside of the Internal Rate

question 78

True/False

The reinvestment assumption is a downside of the internal rate of return method of analysis because it assumes that cash flows are reinvested at the cost of capital.
It actually assumes that cash flows are reinvested at the IRR rate, which can sometimes be excessively high, rendering this assumption unrealistic.

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Definitions:

Tax Bracket

Ranges of income set by the government that determines the rate at which income is taxed.

Long-Term

Refers to holding an asset for more than a year before disposal, affecting the calculation of capital gains and losses for tax purposes.

Short-Term Gain

A profit from the sale of an asset held for one year or less.

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An assortment of financial assets including stocks, bonds, commodities, cash, and equivalents, such as mutual funds and exchange-traded funds (ETFs).