Reinvestment Rate Assumption Assignment Help

According to reinvestment rate assumptions, the calculation of NPV is based on the assumption that cash inflows can be reinvested at the project’s risk adjusted WACC. On the other hand, the IRR calculation is based on the assumption that cash flows can be reinvested at the IRR. It shows that the IRR method implicitly assumes that a firm can reinvest project’s cash inflows at the project’s IRR throughout the life of the project. This assumption seems unrealistic for those projects, which have high IRRs because the IRR does not represent the rate of return that a firm can earn on reinvested cash inflows. Therefore, the firm’s WACC is probably more tenable reinvestment rate assumption for investment opportunities. For many firms, reinvesting at firm’s WACC is more logical as compared to reinvesting a project’s IRR for following reasons:

1. If the company is using internally generated cash flows from past projects rather than external capital, this will save it the cost of capital equals to WACC.
2. Through WACC, the company can also raise all the capital it needs at the going rate, if it has reasonably good access to capital markets.

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