Answer (D) is correct . The NPV method assumes that periodic cash inflows earned over the life of an investment are reinvested at the company’s cost of capital (i.e., the discount rate used in the analysis). This is contrary to the assumption under the internal rate of return method, which assumes that cash inflows are reinvested at the internal rate of return. As a result of this difference, the two methods will occasionally give different rankings of investment alternatives.
Answer (A) is incorrect because The NPV method assumes that cash inflows are reinvested at the discount rate used in the NPV calculation.
Answer (B) is incorrect because The cost of debt may or may not reflect the firm’s actual cost of capital.
Answer (C) is incorrect because The internal rate of return method assumes a reinvestment rate equal to the rate of return on the project.
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