The Reinvestment Rate Assumption Fallacy for IRR and NPV: A Pedagogical Note

Magni, Carlo Alberto and Martin, John D. (2017): The Reinvestment Rate Assumption Fallacy for IRR and NPV: A Pedagogical Note.

Abstract

The mistaken notion that the internal rate of return (IRR) and net present value (NPV) have required reinvestment rate assumptions built into them was debunked long ago in the academic finance literature. There are no reinvestment rate assumptions built into, or implicit to, the computation and use of either the IRR or NPV. In this brief note, we first review the theoretical underpinnings of the rate of return assumption fallacy and offer two possible origins from the academic finance literature that may have been responsible for the fallacy.

• Item Type: MPRA Paper
• Language: English
• Keywords: internal rate of return, reinvestment rate, NPV, MIRR
• Subjects: G - Financial Economics > G0 - General; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity

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