Hi Can someone explains why it’s often said that with IRR, it’s assumed that all CF from the project are reinvested at IRR rate ? I assume we are not doing this assumption with NPV calculation Since IRR and NPV are linked (IRR is making NPV equal to zero), I don’t understand why we have this “it’s assumed that all CF from the project are reinvested at IRR rate” Tks
NPV assumes that interim CF are reinvested at the discount rate/ cost of capital.
I might be wrong but the way I think of it this. NPV uses a stated discount rate when you have a positive NPV there is excess value over the discount rate used. If the NPV is negative then there would be negative value with the stated discount rate. Since IRR sets NPV to zero it is reinvesting all of the CF at the rate that creates no excess or negative NPV. Therefore, if you calculated NPV and had a positive value the IRR would be higher than the discount rate.