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Cost‐benefit Analysis and the Controversial Reinvestment Assumption in IRR and NPV Estimates: Some New Evidence Against Reinvestment Assumption
Author(s) -
Arjunan Kannapiran C.,
Kannapiran Karthi
Publication year - 2017
Publication title -
economic papers: a journal of applied economics and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.245
H-Index - 19
eISSN - 1759-3441
pISSN - 0812-0439
DOI - 10.1111/1759-3441.12179
Subject(s) - net present value , cash flow , internal rate of return , investment (military) , economics , reliability (semiconductor) , econometrics , present value , rate of return , capital (architecture) , value (mathematics) , capital budgeting , cost of capital , modified internal rate of return , return on investment , actuarial science , microeconomics , mathematics , statistics , finance , investment performance , production (economics) , profit (economics) , power (physics) , physics , archaeology , quantum mechanics , politics , project appraisal , political science , law , history
The reliability of CBA and the capital investment analysis is often questioned because of the controversy surrounding the assumption of reinvestment. The validity of this assumption is evaluated using new approaches and the results are summarised in this paper. These results provide sufficient evidence that there is no reinvestment of intermediate income in the internal rate of return ( IRR ) or net present value ( NPV ) estimates. The results are consistent under both normal and non‐normal cash flow projects. Obviously, text books dealing with capital investment analysis should move away from such an assumption. The CBA and the capital investment analysis using the IRR and NPV is, therefore, reliable.