In what sense is a reinvestment rate assumption embodied in the NPV, IRR. and MIRR methods? What is the assum

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Answer 1

IRR assumes that all cash flows are reinvested at the project's rate of return, seldom a defensible assumption.

Since NPV discounts future cash flows at the investor's cost of capital, it more accurately represents the value of a project. It assumes that cash flows are reinvested at the cost of capital. This is a good assumption so long as the financing can be repaid in stages so as to reduce interest or equity cost.

MIRR enables a project to be described with the simplicity of a percentage rate of return, as with IRR, but does not assume that cash flows can be effectively reinvested in the project at the calculated rate of return. Instead, cash flows are assumed to be reinvested at any given rate, such as a bank interest rate.

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