Chapter 10.5, Problem 10.13RQ

Summary Introduction

To discuss:

Does the reinvestment of intermediate cash inflow favor NPV or IRR.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value. Internal Rate of Return is a measure used in the capital budgeting which estimates the profitability of potential investments. IRR is computed as a discount rate that makes the net present value of all cash flows from an investment as zero. The reinvestment rate can be defined as the amount of interest that is earned when money is taken out of a fixed income investment and put to another.