DCF Methods and Implicit Re-Investment Assumptions: Changing Reinvestment Rate, Consequences And Modified Methods

Abstract

The estimates of NPV and IRR, computed in a conventional way, can emerge misleading, in the event, the reinvestment rate turns lower than the implicit rate of the model. If future reinvestment rates turn promising, the actual figure of NPV and IRR can emerge better. Contrary to this, if the future growth rates look very dull, NPV or IRR estimates will remain unrealized. Hence, to act rationally, trying the modified methods are recommended for the firms undertaking a project appraisal.