medium · Principles of Finance capital-budgeting
Which of the following best describes the 'reinvestment rate assumption' conflict between NPV and IRR?
- IRR assumes interim cash flows are reinvested at the cost of capital, making it a more conservative method than NPV.
- The reinvestment rate assumption only becomes mathematically relevant for projects that end up producing a negative NPV.
- NPV assumes no reinvestment of intermediate cash flows at all, whereas IRR assumes reinvestment occurs at the risk-free market rate.
- NPV assumes intermediate cash flows are reinvested at the cost of capital, while IRR assumes they are reinvested at the IRR.
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