IRR

This topic has 3 replies, 2 voices, and was last updated 11 years ago by John Moffat.

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February 16, 2015 at 10:17 am #228565
SOUD SAEED
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Hello Mr Moffat,

I didn’t exactly understood ‘The proceeds are reinvested at IRR,’ kindly unfold my ambiguity.

Thanks
February 16, 2015 at 5:19 pm #228673
John Moffat
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When we get cash inflows from the project, the question is what does the company do with the cash.

NPV assumes that it is used to pay back the borrowing and therefore saves money at the cost of capital. IRR (if used to make decisions) assumes that the money is re-invested in similar projects so as to earn the same return as the project and therefore continues to earn at the IRR.
February 19, 2015 at 8:28 am #229139
SOUD SAEED
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Thank you very much Sir,
And also congratulations for the PQ magazine awards 2015, you definitely deserve it.

Sir just one minor question, One of the limitations of CAPM, is its is a ‘One period Model’ what does it actually mean?

Thanks once again for everything.

Soud Saeed.
February 19, 2015 at 8:56 am #229149
John Moffat
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Thank you for your comments 🙂

‘One period model’ means that it was only actually proved over one year. However it is generally accepted to work in the longer term as well (and in exam calculations we assume that it does).
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