In what sense is a reinvestment rate assumption embodied in the NPV, IRR, and MIRR methods? What is assumed reinvestment rate of each method?
2006-12-04 07:30:58 · 2 answers · asked by prinsaysovdarkness 2 in Business & Finance ➔ Investing
Reinvestment rate assumption is how much of your potential gain you can reinvest back in the company and how much you enhance the return on investment based on this reinvestment. NPV, IRR etc; are investment criterions. If you keep reinvesting the net present value is bound to go up on increased cash flows which gives larger return on investments than what you started with.
Reinvestment rates should be higher than the cost of capital which sometimes is also calledMIRR.
2006-12-07 07:46:03 · answer #1 · answered by Mathew C 5 · 0⤊ 0⤋
Each method requires input of an assumed interest rate as a parameter of the calculation. That interest rate has been referred to as the cost of capital, but is probably the same as the reinvestment rate you refer to.
2006-12-04 07:54:58 · answer #2 · answered by Rich D 3 · 0⤊ 0⤋