If there is an investment in the market which asks you to pay $100 and in return you receive $40 in Y1, $30 in Y2, and $80 in Y3, I want to ask where does the re-investment assumption kick in?
- The IRR to this question is 20%. However, IRR assumes we re-invest interim cash flows at IRR to achieve the CF’s, but in this case we are getting paid in Y1, Y2, and Y3, so does the IRR assumption of re-investment still hold? I just want to tie this concept to the curriculum’s saying that reinvestment at IRR is unrealistic - but I want to understand if the project promises to pay these CF’s, do I need to depend on the reinvestment assumption? I know how to construct the below, but the below still does not answer my question, because investments assume to pay me the interim cash flows instead of extracting them from my investment of $100 (so essentially I do not own the $100 after I pay it to the project manager for example).
Year CF In Account (CF @ 20%) Withdrawal (Net) 0 -100 -100 N/A N/A 1 100 120 40 80 2 80 96 30 66 3 66 80 80 0