Reinvestment rate assumption
[DOC File]Texas Tech University
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What is the "reinvestment rate assumption”, and how does it affect the NPV versus IRR conflict? Answer: The underlying cause of ranking conflicts is the reinvestment rate assumption. All DCF methods implicitly assume that cash flows can be reinvested at some rate, regardless of what is actually done with the cash flows.
reinvestment assumption - Financial Definition
The reinvestment rate assumption refers to the rate at which reinvestment of intermediate cash flows theoretically may be achieved under the NPV or the IRR methods. The NPV method assumes the intermediate cash flows are reinvested at the discount rate, whereas the IRR method assumes intermediate cash flows are reinvested at the IRR.
[DOC File]Capital Budgeting - exinfm
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How large is the potential impact of a flawed reinvestment-rate assumption? Managers at one large industrial company approved 23 major capital projects over five years on the basis of IRRs that averaged 77 percent. Recently, however, when we conducted an analysis with the reinvestment rate adjusted to the company's cost of capital, the true ...
[DOC File]Texas Christian University
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Since compounding assumes reinvestment, so does discounting. NPV and IRR are both found by discounting, so they both implicitly assume some discount rate. Inherent in the NPV calculation is the assumption that cash flows can be reinvested at the project's cost of capital, while the IRR calculation assumes reinvestment at the IRR rate. g. 3.
[DOC File]chapter
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(11-5) Reinvestment rate assumption F I Answer: a EASY. 1. The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.
[DOC File]Capital Budgeting Basics, Instructor's Manual
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Thus, since these cash flows are expected to save the firm 10 percent, this is their opportunity cost reinvestment rate. The IRR method assumes reinvestment at the internal rate of return itself, which is an incorrect assumption, given a constant expected future cost of capital, and ready access to capital markets. 11 21 a.
[DOC File]Capital Budgeting Basics, Instructor's Manual
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This reinvestment rate assumption may lead to different decisions in selecting among mutually exclusive projects when any of the following factors apply: (1) differences in timing of cash flows among the projects, (2) differences in scale, and (3) differences in the useful lives of the projects.
[DOC File]8 - Wiley-Blackwell
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Why is the reinvestment rate assumption critical to bond portfolio management? 13-10. The reinvestment rate determines the ultimate value of the portfolio. It may well be different from the computed yield on the instrument. Furthermore, the funds from reinvested interest are likely to be much larger than the actual interest payments themselves ...
[DOC File]Chapter 11
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Feb 15, 2012 · Evaluation of capital budgeting using various techniques such as accounting rate of return method, payback period method, net present value method and internal rate of return method. The most powerful is the net present value method, if projects are mutually exclusive and if not mutually exclusive, then the deciding factor will be the NPV index.
[DOC File]Answers to Text Discussion Questions
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Example 12 — IRR Distortions from Reinvestment Rate Assumption. A summary of four simple projects with IRR and NPV: Cash Inflows. Project Investment Year-1 Year-2 IRR NPV. A $ 2,000 $ - 0 - $ 4,500 50% $ 3,130. B 2,000 1,500 2,250 50% 2,810. C 2,000 2,450 1,000 55% 2,640 ...
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