Reinvestment rate assumption definition

    • Revisiting the Reinvestment Rate

      known as 'Fisher’s rate'.The assumption regarding the reinvestment rate is fundamental to the discussion about capital budgeting decisions and recognizing the reinvestment rate in an explicit manner is essential for appreciating the implications of the NPV/IRR methodology on investment decisions.This paper explains how investment decisions ...

    • [PDF File]The Real Reinvestment Rate Assumption as a Hidden Pitfall

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      The reinvestment rate assumption constitutes a drawback of this approach, as it assumes that every time a cash inflow occurs it can be reinvested to earn the IRR for the remainder of the project„s life. Sometimes this is an unrealistic assumption, especially for high-IRR projects.” (Laux 2011:30) ...

    • The Reinvestment Rate Assumption Fallacy for IRR and NPV

      Implicit is the assumption that the firm has an infinite stream of projects yielding similar IRRs.3 NPV and PI assume reinvestment at the discount rate. IRR assumes reinvestment at the internal rate of return.4 These quotations are not unique. A quick search of the internet produces dozens of references to the

    • Re-examining an Old Question: Does the IRR Method Implicitly ... - JSTOR

      reinvestment rate assumption.4 This argument appears to draw a distinction albeit without a clear difference.5 Most of the post-1950s academic and practitioner literature, however, has rejected the idea of an implicit reinvestment rate assumption embedded in the IRR method. Academic articles generally critical of an implicit reinvestment rate

    • [PDF File]Development of the Ultimate Reinvestment Rates (URRs)

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      reinvestment strategies. One segment represented a pool of long-term life insurance liabilities, and the other segment included a pool of payout annuities; this focussed on the products most impacted by a long-term low interest-rate environment. Each included a reinvestment strategy

    • [PDF File]The Real Reinvestment Rate Assumption as a Hidden Pitfall - MTA K

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      The reinvestment rate assumption constitutes a drawback of this approach, as it assumes that every time a cash inflow occurs it can be reinvested to earn the IRR for the remainder of the project„s life. Sometimes this is an unrealistic assumption, especially for high-IRR projects.” (Laux 2011:30) ...

    • [PDF File]The Reinvestment Assumption - Marshall University

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      it is now possible to solve for the discount rate k that would cause the value of the cash outflow s to eq ual the valu e of the cas h inflow s. This discount rate i s call ed th e inter nal rate of return (IRR). The IRR gives the analysis a relative dimension. For example, you might find that the IRR for a certain project is 15%.

    • The controversial reinvestment assumption in IRR and NPV estimates: New ...

      the assumption of reinvestment of the intermediate income in the estimation of IRR and NPV. A simulation study is conducted to test the validity of this assumption. The simulation involves a factual run ‘without reinvestment’ and a counterfactual run ‘with reinvestment’ as the introduced shock. The result

    • [PDF File]The Reinvestment Rate Assumption Fallacy for IRR and NPV: A ... - LMU

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      NPV and PI assume reinvestment at the discount rate. IRR assumes reinvestment at the internal rate of return.4 In this brief note, we first review the theoretical underpinnings of the rate of return assumption fallacy. Next, we offer two possible origins from the academic finance literature that may be responsible for the fallacy.

    • [PDF File]The Real Reinvestment Rate Assumption as a Hidden Pitfall

      https://info.5y1.org/reinvestment-rate-assumption-definition_1_051bc1.html

      The reinvestment rate assumption constitutes a drawback of this approach, as it assumes that every time a cash inflow occurs it can be reinvested to earn the IRR for the remainder of the project ...

    • The Reinvestment Rate Assumption Fallacy for IRR and NPV

      The Reinvestment Rate Assumption Fallacy for IRR and NPV: A Pedagogical Note Abstract 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

    • [PDF File]Yield-to-Maturity and the Reinvestment of Coupon Payments: Reply

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      produces a present value equal to the purchase price of the security.” Note that the definition explicitly states that YTM is a discount rate and is used to equate future cash flows with the bond price or present value. No assumption or condition for the reinvestment of coupon payments is made or required. The

    • [PDF File]Section 7.4: Reinvestment Rates - Texas A&M University

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      at a rate i with reinvestment of interest at rate j, Example: Payments of $10()0 are invested at the beginning of each year for 10 years. ... To use the basic definition of effective rate of interest, we assume the principal remains ... terest assumption. As long as the C/ 's are small in comparison to A it will be a good approximation.

    • [PDF File]Yield-to-Maturity and the Reinvestment of Coupon Payments

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      A common qualifier to the standard YTM definition is that the “actual” or “realized” yield is subject to the coupon reinvestment at the YTM rate. With this (unnecessary) assumption the focus of yield-to-maturity is no longer on the yield the money invested in a bond will “realize” in

    • [PDF File]Chapter 7: Yield Rates Section 7.4: Reinvestment Rates - Texas A&M ...

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      rower at a reinvestment rate equal to the original investment rate. Now lets consider the situation in which the reinvestment rate is di erent from the rate at which the payments are made. Consider the investment of 1 for n periods at rate i such that the interest is reinvested at rate j. Find the accumulated value at the end of n periods.

    • The Reinvestment Rate Assumption Fallacy for IRR and NPV

      reinvestment rate assumptions (or requirements) built into, or implicit to, their computation.1 However, the notion persists”. For example, consider the following statement in Investopedia:

    • Robert Carlson, Michael L. Lawrence, University of Illinois

      The treatment of the reinvestment rate assumption in the literature is sufficiently ambiguous that many. conclude that reinvestment is included in the mechanics of calculating internal rate of return and net present value while others assume that reinvestment is only an im- plicit assumption necessary when two or more alternatives are com- ...

    • [PDF File]Teaching MIRR to Improve Comprehension of Investment Performance ...

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      definition looks at the reinvestment of interperiod cash flows, a direct comparison with IRR and NPV, becomes invalid. Secondly: we reference previous work which provides an “economic interpretation” for IRR and highlights the relationship between IRR and MIRR in the context of a “realized rate of return”. Reinvestment Assumption

    • [PDF File]American Journal Of Business Education July/August 2012 Volume 5 ...

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      Without a reinvestment assumption, Wo and Wn are uniquely determined only for projects that have no intermediate cash flows. Beaves argument suggests that if $100,000 were invested at t = 0 and $150,000 cash was received at the ... Both the 23.4% and the 14.5% fit the definition of IRR - that rate which equates the cash outlay to the cash ...

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