Explain the Different Reinvestment Rate Assumptions of Npv and Irr
This is because in case of Project C more cash flows are in Year 1 resulting in longer reinvestment periods at higher reinvestment assumption and hence it has a higher IRR. Meanwhile the internal rate of return IRR is a discount rate that makes the net present value NPV of all cash flows from a particular project equal to. Pdf Reinvestment Rate Assumptions In Capital Budgeting A Note Ken Johnston Academia Edu Approaching the question For NPV the reinvestment assumption is that funds are reinvested at the market determined cost of capital. . Project cash flows are reinvested at the projects own IRR. The difference is NPV is the sum of the present values of the cash flows at a particular interest rate whereas IRR is the interest rate that will cause the NPV to be equal to zero Cornett Adair Nofsinger 2016 p321. The NPV has no reinvestment rate assumption. Although the IRR is easy to calculate many people find this textbook d...