Question

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

Solution

Verified

For 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.

Create an account to view solutions

By signing up, you accept Quizlet's Terms of Service and Privacy Policy
Continue with GoogleContinue with Facebook

Create an account to view solutions

By signing up, you accept Quizlet's Terms of Service and Privacy Policy
Continue with GoogleContinue with Facebook

Recommended textbook solutions

Fundamentals of Corporate Finance 7th Edition by Alan J. Marcus, Richard A. Brealey, Stewart C. Myers

Fundamentals of Corporate Finance

7th EditionISBN: 9780078034640Alan J. Marcus, Richard A. Brealey, Stewart C. Myers
807 solutions
Corporate Finance 4th Edition by Jonathan B. Berk, Peter DeMarzo

Corporate Finance

4th EditionISBN: 9780134083278 (5 more)Jonathan B. Berk, Peter DeMarzo
1,224 solutions
Corporate Finance 4th Edition by Jonathan B. Berk, Peter DeMarzo

Corporate Finance

4th EditionISBN: 9780134202914Jonathan B. Berk, Peter DeMarzo
1,224 solutions
Fundamentals of Financial Management, Concise Edition 9th Edition by Eugene F. Brigham, Joel F Houston

Fundamentals of Financial Management, Concise Edition

9th EditionISBN: 9781305635937 (2 more)Eugene F. Brigham, Joel F Houston
1,204 solutions

Related questions