## What reinvestment rate assumptions are built into the npv

Downloadable! The mistaken notion that the internal rate of return (IRR) and net present value (NPV) have required reinvestment rate assumptions built into  As originally proposed in early works on discounted cash flow methods, reinvestment rate assumptions were explicitly made as a means of choosing between NPV

To explain: The reinvestment rate assumptions that are built into the NPV, IRR and MIRR methods. Introduction: Net Present Value (NPV):. It is a method under   there are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV. Cash flows thrown off by capital  26 Dec 2017 The fact is that there are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV. Cash flows  25 Jan 2019 Companies commonly use the net present value and internal rate of return techniques to better understand the feasibility of projects. 19 Jan 2018 The fact is that there are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV. Cash flows

## ^ Lohmann, J.R., “The IRR, NPV and the fallacy of the reinvestment rate assumptions”. The Engineering Economist 33(4), 1988, 303–30. ^ Keef, S.P., and M.L.

NPV, on the other hand, takes into consideration the time value of money. The method assumes that the reinvestment rate is equal to the cost of capital while future cash flows are discounted at the cost of capital (Beaves, 1988). NPV makes a different assumption which is that it is reinvested but at the required rate of return. There are no reinvestment assumptions implicit in either the NPV or IRR assumptions. In particular, I disagree with Mike’s statement that “ If, on the other hand, the CF is retained in the business, or not distributed to the investor, then the assumption is that such CF is reinvested at the IRR rate.” The mistaken notion that the internal rate of return (IRR) and net present value (NPV) contain reinvestment rate assumptions lingers in teaching materials and corporate practice. The fact is that there are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV. To explain: The reinvestment rate assumptions that are built into the NPV, IRR and MIRR methods. Introduction: Net Present Value (NPV): It is a method under capital budgeting which includes the calculation of net present value of the project in which the company is investing. What reinvestment rate assumptions are built into the NPV, IRR, and MIRR methods? The NPV method assumes reinvestment at the cost of capital, while the IRR method assumes reinvestment at the IRR. MIRR is a modified version of IRR that assumes reinvestment at the cost of capital.

### There are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV. In this brief note, we first review the theoretical underpinnings of the rate of return assumption fallacy and offer two possible origins from the academic finance literature that may have been responsible for the fallacy.

reinvestment rate assumptions built into them lingers in teaching materials and corpo rate practice. The The fact is that there are no reinvestment rate assumptions b uilt into, or implicit to The assumptions, as noted below, include timing (e.g. end of year), continuous multiplication, and in simplest form, one interest rate rather than the actual curve of rates by term. I DO believe that reinvestment is assumed, at least implicitly. A There's only a reinvestment rate assumption embodied if you are receiving money at some point you will need to reinvest - this is not necessarily the case for all present value problems. It's easiest to see that there's a reinvestment rate involved if you look at an example.

### ^ Lohmann, J.R., “The IRR, NPV and the fallacy of the reinvestment rate assumptions”. The Engineering Economist 33(4), 1988, 303–30. ^ Keef, S.P., and M.L.

There's only a reinvestment rate assumption embodied if you are receiving money at some point you will need to reinvest - this is not necessarily the case for all present value problems. It's easiest to see that there's a reinvestment rate involved if you look at an example. "Reinvestment Rate Assumption" Definition. Although the term seems like something out an advanced economics class with little real life relevance, there are circumstances where an investor should

## there are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV. Cash flows thrown off by capital

Computed as a %. Discount rate that forces PV of inflows to equal costs. -Rate of return on project. - Discount rate that forces a project's NPV to = \$0. -If IRR> WACC, the project's return exceeds its costs and there is some return left over to boost stockholders return. -IRR method assumes CFs are reinvested at IRR. NPV, on the other hand, takes into consideration the time value of money. The method assumes that the reinvestment rate is equal to the cost of capital while future cash flows are discounted at the cost of capital (Beaves, 1988). NPV makes a different assumption which is that it is reinvested but at the required rate of return. There are no reinvestment assumptions implicit in either the NPV or IRR assumptions. In particular, I disagree with Mike’s statement that “ If, on the other hand, the CF is retained in the business, or not distributed to the investor, then the assumption is that such CF is reinvested at the IRR rate.” The mistaken notion that the internal rate of return (IRR) and net present value (NPV) contain reinvestment rate assumptions lingers in teaching materials and corporate practice. The fact is that there are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV.

there are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV. Cash flows thrown off by capital  26 Dec 2017 The fact is that there are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV. Cash flows  25 Jan 2019 Companies commonly use the net present value and internal rate of return techniques to better understand the feasibility of projects. 19 Jan 2018 The fact is that there are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV. Cash flows