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Jan. 28, 2023•0 likes•3 views

Jan. 28, 2023•0 likes•3 views

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What is meant by the \"reinvestment assumption\" and how does this differ between NPV method and the IRR? What does this difference (if any) mean to the outcome of a specific project, shareholders and investors in general? Solution In the NPV method, the cash flows are assumed to be reinvested at the discount rate In the IRR method, the cash flows are assumed to be reinvested at the project\'s own internal rate of return The IRR method may lead to multiple IRR\'s when the project has non-convetional cash flows( both positive and negative cash flows during the project term) and this may lead to wrongly accepting or rejecting a project. Again in terms of mutually exclusive projects, The NPV(reinvestment at dicount rate) may be baised towards long term projects. .

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- 1. What is meant by the "reinvestment assumption" and how does this differ between NPV method and the IRR? What does this difference (if any) mean to the outcome of a specific project, shareholders and investors in general? Solution In the NPV method, the cash flows are assumed to be reinvested at the discount rate In the IRR method, the cash flows are assumed to be reinvested at the project's own internal rate of return The IRR method may lead to multiple IRR's when the project has non-convetional cash flows( both positive and negative cash flows during the project term) and this may lead to wrongly accepting or rejecting a project. Again in terms of mutually exclusive projects, The NPV(reinvestment at dicount rate) may be baised towards long term projects.