mutually exclusive projects & reinvestment rate
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In what sense is a reinvestment rate assumption embodied in the NPV, IRR, and MIRR methods? What is the assumed reinvestment rate of each method?
As a financial officer, you must determine which project your company should accept. The projects are mutually exclusive and the net present value (NPV) calculations for each take into account the project's risk. Indicate which project (A or B) you would recommend and explain your reasons for this recommendation.
Project: A
NPV: 3 million dollars
RISK LEVEL: very risky
Project: B
NPV: 2.5 million dollars
RISK LEVEL: very safe
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Solution Summary
Answers two conceptual questions. The first one is on what is the embodied reinvestment rate in IRR, NPV and MIRR and the second one is on selecting the best project out of two mutually exclusive projects. Whether one should take a decision based on the NPV or risk level or a combination of both is explained?
Solution Preview
1. The NPV and IRR methods both involve compound interest and assume that all cash flows received during the intermediate periods is reinvested till the project ...
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