General Studies · Capital Budgeting
A critical, often unstated, assumption of the Net Present Value (NPV) method is related to the reinvestment of intermediate cash flows. What is this assumption?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Intermediate positive cash flows are reinvested at the risk-free rate, as future reinvestment is uncertain.
- 2Intermediate positive cash flows are reinvested at the Internal Rate of Return (IRR) of the project.
- 3Intermediate positive cash flows are reinvested at the project's discount rate (cost of capital).✓
- 4All positive cash flows generated by the project are immediately returned to shareholders as dividends.
Correct answer
Intermediate positive cash flows are reinvested at the project's discount rate (cost of capital).
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