The Real Reinvestment Rate Assumption as a Hidden Pitfall
The paper explores a few hidden problems of the reinvestment rate assumption. The automatism of net present value method creates and applies a very special reinvestment rate assumption. This assumption does not disturb the evaluation of investment projects with orthodox cash flow patterns. However,...
| Main Author: | |
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| Format: | Article |
| Language: | English |
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University of Miskolc
2016-07-01
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| Series: | Theory, Methodology, Practice |
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| Online Access: | https://doi.org/10.18096/TMP.2016.01.06 |
| _version_ | 1797816678228164608 |
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| author | Mária Illés |
| author_facet | Mária Illés |
| author_sort | Mária Illés |
| collection | DOAJ |
| description | The paper explores a few hidden problems of the reinvestment rate assumption. The automatism of net present value method creates and applies a very special reinvestment rate assumption. This assumption does not disturb the evaluation of investment projects with orthodox cash flow patterns. However, in the case of unorthodox cash flow patterns, automatism constructs a serious mistake in the calculations. In this case, the net present value provides wrong information about the economic efficiency. However, according to the general academic opinion, the net present value method is suitable for evaluation in the case of unorthodox cash flow patterns as well, as there can be only one net present value as opposed to the opportunity of several internal rates of return. The paper sets out to prove that this way of evaluation is wrong, and works out a solution based on the real economic basis. |
| first_indexed | 2024-03-13T08:41:14Z |
| format | Article |
| id | doaj.art-99654251dce94d9b825c9d69ab146764 |
| institution | Directory Open Access Journal |
| issn | 1589-3413 2415-9883 |
| language | English |
| last_indexed | 2024-03-13T08:41:14Z |
| publishDate | 2016-07-01 |
| publisher | University of Miskolc |
| record_format | Article |
| series | Theory, Methodology, Practice |
| spelling | doaj.art-99654251dce94d9b825c9d69ab1467642023-05-30T10:00:48ZengUniversity of MiskolcTheory, Methodology, Practice1589-34132415-98832016-07-0112014760The Real Reinvestment Rate Assumption as a Hidden Pitfall Mária Illés 0University of Miskolc The paper explores a few hidden problems of the reinvestment rate assumption. The automatism of net present value method creates and applies a very special reinvestment rate assumption. This assumption does not disturb the evaluation of investment projects with orthodox cash flow patterns. However, in the case of unorthodox cash flow patterns, automatism constructs a serious mistake in the calculations. In this case, the net present value provides wrong information about the economic efficiency. However, according to the general academic opinion, the net present value method is suitable for evaluation in the case of unorthodox cash flow patterns as well, as there can be only one net present value as opposed to the opportunity of several internal rates of return. The paper sets out to prove that this way of evaluation is wrong, and works out a solution based on the real economic basis.https://doi.org/10.18096/TMP.2016.01.06 reinvestment rate assumptionnet present valueinternal rate of returnorthodox and unorthodox cash flow patternrankingaggregate capital needs |
| spellingShingle | Mária Illés The Real Reinvestment Rate Assumption as a Hidden Pitfall Theory, Methodology, Practice reinvestment rate assumption net present value internal rate of return orthodox and unorthodox cash flow pattern ranking aggregate capital needs |
| title | The Real Reinvestment Rate Assumption as a Hidden Pitfall |
| title_full | The Real Reinvestment Rate Assumption as a Hidden Pitfall |
| title_fullStr | The Real Reinvestment Rate Assumption as a Hidden Pitfall |
| title_full_unstemmed | The Real Reinvestment Rate Assumption as a Hidden Pitfall |
| title_short | The Real Reinvestment Rate Assumption as a Hidden Pitfall |
| title_sort | real reinvestment rate assumption as a hidden pitfall |
| topic | reinvestment rate assumption net present value internal rate of return orthodox and unorthodox cash flow pattern ranking aggregate capital needs |
| url | https://doi.org/10.18096/TMP.2016.01.06 |
| work_keys_str_mv | AT mariailles therealreinvestmentrateassumptionasahiddenpitfall AT mariailles realreinvestmentrateassumptionasahiddenpitfall |