Both net present value (NPV) and the internal rate of return (IRR) have a reinvestment assumption.Required:A. State the assumption for each method.B. One of the advantages of the NPV method is that users can adjust for risk considerations. Explain how this is done.
What will be an ideal response?
A. In the NPV method, cash flows are assumed to be reinvested at the hurdle rate. With the IRR, cash flows are assumed to be reinvested at the same rate as the project's return.
B. In the NPV method, a higher hurdle rate can be used, either for the entire analysis or for the estimated cash inflows (savings) that occur late in the project's life.
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