Answered: Why is it more reasonable to assume, as…

Why is it more reasonable to assume, as the NPV rule does, that the intermediate cash flows are reinvested at the cost of capital rather than the internal rate of return (IRR)?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 3Q: Why is it true, in general, that a failure to adjust expected cash flows for expected inflation...

See similar textbooks

Related questions

Q: What is alternative cash flow measures?

A: Cash flow refers to the amount of cash that moves in and out of the business because of its…

Q: What is Internal Rate of Return - Variable Cash Flows with Reversion? Please provide examples.

A: The internal rate of return is the one of the discounted techniques of capital budgeting which is…

Q: Does the payback-period analysis ignore differences in the timing of cash flows?

A: The time value of money (TVM) is the possibility that in view of its inevitable procuring influence,…

Q: Discuss Positive side effects and negative side effects cash flows? Provide examples. Explain the…

A: Solution- What is Cash flow- Cash flows are internet the net of money and cash-equivalents…

Q: what is the most likely fair value method to utilize the Discountd Cash Flow model?

A: Discounted Cash Flow: The discounted cash flow model,estimates the intrinsic value of a security…

Q: Cashflow vs. net income: Which strategy is more appropriate?

A: instruction: The direct and indirect routes to a cash flow statement are both found there.

Q: what are usefulness and weakness of discounted cash flow method?

A: Discounted Cashflow Method is the Method in which we compare Initial Project cost with expected…

Q: do liquid assets frequently have lower rates of return than fixed assets?

A: Liquid assets are the cash or cash equivalents which can be drained out frequently whereas fixed…

Q: What condition regarding cash flows would cause more than oneIRR to exist?

A: IRR (Internal Rate of Return) is the interest rate where net present value of a project equals to…

Q: What is the crossover rate, and how does its value relative to the cost of capital determinewhether…

A: Crossover rate is a rate where net present values of two mutually exclusive projects are equal to…

Q: Why is it true that a reinvestment rate is implicitly assumed whenever we find thepresent value of a…

A: Discounting is the method of assessing the real value of a potential transaction or collection of…

Q: The NPV method determines how much the present value of cash inflows exceeds the present value of…

A: The amount of difference between the PV (present value) of cash inflows and cash outflows is called…

Q: What is the significance of the FCF (Free Cash Flow) in the area of valuation?

A: Cash flows refer to the cash expenditure and cash receipt of the business over a specific time…

Q: hat is "free cash flow" and how is it different from net income? Which of the two componenets is…

A: Free cash flow is very important in valuation of the company and cash is very important for the…

Q: Why is the free cash flow valuation model so widely used?

A: With the free cash flow of the firm, administrators will focus on potential businesses that increase…

Q: What is irregular cash flow stream?

A: Cash Flow has a flow concept. There can either be cash inflow or cash outflow. Generally, for…

Q: Define the positive cash flows?

A: The positive cash flow is the state of the organization wherein money inflows to an enterprise over…

Q: To find NPV, it requires

A: NPV or net present value technique is used to determine the present value of all future cash flows.…

Q: How do unequal cash flows affect the future value of an investment?

A: Unequal cash flows, meaning that the amounts of money received or invested at different points in…

Q: Give an example of the Cash-Flow Approach?

A: A cash flow hedge is defined as the transaction done to offset the risks from the variability of the…

Q: Which of the following would decrease free cash flow? O A. year-over-year reductions in inventory B.…

A: Cash flow is the cash inflow and cash outflow in an organization. Cash flow statement consists of…

Q: Why are the net present value and internal rate of return considered discounted cash flow methods?

A: Net present value is the comparison between the net cash inflows received from a future investment…

Q: What is the essence of the discounted cash flow methods?

Q: Which of the following is NOT a limitation of the payback rule? O It does not consider cash flows…

A: In this question, we are required to determine the statement that does not represent the limitation…

Q: Which of the following is NOT a valuation model that is based on discounting cash flows? Select one:…

A: Financial Management: Financial management comprises of two words i.e. Finance and management.…

Q: What are the strenghts and weaknesses of the Discounted Cash Flow methods

A: Cash flow is the movement of money from a particular investment. Discounted cash flows mean…

Question

Why is it more reasonable to assume, as the NPV rule does, that the intermediate cash flows are reinvested at the cost of capital rather than the internal rate of return (IRR)?

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

What is Internal Rate of Return - Variable Cash Flows with Reversion? Please provide examples.
What is "free cash flow" and how is it different from net income? Which of the two componenets is more important?
what are usefulness and weakness of discounted cash flow method?
Discuss Positive side effects and negative side effects cash flows? Provide examples. Explain thestand-alone principle. Provide examples.
Why is it true that a reinvestment rate is implicitly assumed whenever we find thepresent value of a future cash flow? Would it be possible to find the PV of a FV withoutspecifying an implicit reinvestment rate?
To find NPV, it requires Choices: A.none of the choices B.discount rate and estimated cash flows C.investment amount plus discount rate D.discount rate and inflation rate E.estimated cash flow and capital structure
What is Computron’s free cash flow? What are Computron’s “net uses” of its FCF?
Which of the following is NOT a limitation of the payback rule? O It does not consider cash flows occurring after the payback period. O Lacks a decision criterion that is economically based. O It does not consider the time value of money. O It is difficult to calculate.
How do unequal cash flows affect the future value of an investment?
Which of the following statements is correct? The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. O The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period. The NPV method assumes that cash flows will be reinvested at the risk- free rate, while the IRR method assumes reinvestment at the IRR. O The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.
What are: the payback method, the Accounting Rate of Return, and Discounted Cash Flow Model (Net Present Value and Internal Rate of Return)
The discounted payback method discounts cash flows at the opportunity cost of capital and then calculates the payback period. TRUE/FALSE?