Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Chapter 10.5, Problem 10.13RQ
Summary Introduction

To discuss:

Does the reinvestment of intermediate cash inflow favor NPV or IRR.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value. Internal Rate of Return is a measure used in the capital budgeting which estimates the profitability of potential investments. IRR is computed as a discount rate that makes the net present value of all cash flows from an investment as zero. The reinvestment rate can be defined as the amount of interest that is earned when money is taken out of a fixed income investment and put to another.

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Which of the following statements is correct? The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. O The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period. The NPV method assumes that cash flows will be reinvested at the risk- free rate, while the IRR method assumes reinvestment at the IRR. O The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.

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Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)

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