What reinvestment rate assumptions are built into the NPV, IRR, and MIRR methods? Give an explanation for your answer.

Solution

VerifiedFor NPV, the reinvestment rate is the WACC. With this method, it is assumed that the cash flows received from the project will be reinvested at the WACC. The present value of the cash flows is then computed using WACC as a discount rate.

For IRR, the reinvestment rate is the IRR or the rate at which the project breakevens. In other words, the IRR is the rate at which the NPV of the project is 0. With IRR, it is assumed that the cash flows are reinvested at the IRR.

For MIRR, the reinvestment rate is the WACC. To find MIRR, first find the future value of the cash flows using WACC, then find the rate at which the future value of the cash flows would equal 0.