alleryStart learning →The reinvestment assumption criticised in the IRR method is that cash flows are reinvested at the:
AInternal rate of return
BInflation rate of the year
CInterest rate on overdrafts
DInsurance rate on the plant
Answer & Solution
Correct answer: A. Internal rate of return
1. IRR is not just a number, it carries an assumption about what happens next.
2. The IRR assumes that the cash flows are reinvested at the internal rate of return.
3. A firm may find no other project offering a return that high.
4. So the assumption can flatter a project with a high internal rate.
_Source: OpenStax Principles of Finance (CC BY 4.0), Ch 16 'How Companies Think about Investing', sections 16.1-16.5_
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