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:

Consolidated Balance Sheet

A financial statement showing the aggregated financial position of a parent company and its subsidiaries.

Buildings

Buildings refer to structures that are permanently constructed or erected on land, serving as places for residence, business, or other purposes.

Trial Balance

A bookkeeping report that lists the balances of all ledgers in two columns, debits and credits, to verify the arithmetic accuracy of the entries.

Goodwill

An intangible asset representing the excess value of a purchased company over the fair market value of its identifiable tangible and intangible assets.