Question

Which of the following statements is correct?

Group of answer choices

Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

The phenomenon called "multiple internal rates of return" arises when two or more independent projects that have different lives are compared to one another.

The IRR method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

Other things held constant, an increase in the cost of capital will result in an increase in a project's IRR.

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

Answer 1

Correct

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

The IRR method uses the assumption that the funds generated during the life of the project are reinvested at a rate equal to IRR, whereas the NPV assumes that these cash flows are invested at a rate equal to cost of capital