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A. internal rate of return.
B. accounting rate of return.
C. opportunity cost of capital.
Option C is the right answer.
Since the Net Cash flow calculated by the cost of capital, the method assumes that it will have a rate of return for the same same Cost of Capital. Therefore the answer is C.
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A - Wrong, because:
The Internal Rate of Return(IRR) is the percentage, when Net Present Value is equal to zero,
i.e. NPV=0 at IRR = d,
where d represents the discount rate. Here is a break-even point, in general sence, therefore there is no any assumption for re-investment. i.e. we still do not have a valid and significant reasoning for reinvestment, rather then expert opinions (which are usually not quantifiable).
B - Wrong, because:
As, the account rate of return does not take the time value of money, as it represents a simple ration, therefore it is not wise to speak on re-investment here.
C - Correct, reasoning:
The NPV indeed is a calculation that states whether the alternative oportunity cost is significant or not. Oportunity cost of capital in this question is rigiruously correct, but in general, the correct answer would be the "alternative opportunity cost"!
*Re-investment means, to inject to other projects, so if Alternative Oportunity cost is significant, i.e. in case NPV is significantly less than zero, than it is better to shift to a more feasible project, i.e. to re-invest the available funds to a project that gives feasible outcomes.
*Still, this question and answer underlines many assumptions, e.g. it is assumed that the economic NPV is positive in each case, the comparative projects are equally likely to be selected, no difference in market entry barriers, if there are then they should be quantifiable and inserted in analysis etc. And it is even more assumed that, the obtained outcomes/results are at least the mean values of probability density functions (if real feasibility studies are imposed).
option C=====================
A. internal rate of return.
the correct answer is A----------------------------------------
A Net Present value assumes proceeds are reinvested at the internal rate of return
