Question

Which of the following capital budgeting assumes that any cash flows generated by a project can be reinvested at its internal rate of return (IRR)? traditional payback period method discounted payback period method net present value (NPV) method internal rate of return (IRR) method modified internal rate of return (MIRR) method

Answer 1

The net present value (NPV) method of capital planning makes the assumption that all project-related cash flows can be reinvested at their internal rate of return (IRR).

Which of the following approaches considers cash flows to be reinvested at the IRR?

• In order to calculate the IRR, it is assumed that cash flows are reinvested at a rate of return equal to the IRR. According to the MIRR technique, cash flows are reinvested at a rate of return equal to the cost of capital.
• The internal rate of return (IRR) method suggests that the company has the option to reinvest at the firm's needed rate of return, but the net present value (NPV) method implicitly assumes that the rate at which cash flows can be reinvested is the project's IRR.
• The net present value (NPV) method of capital planning makes the assumption that all project-related cash flows can be reinvested at their internal rate of return (IRR).      

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