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Hi john
For IRR it says that it assumes that the cash flows are reinvested at the the IRR! I didn’t understand this! IRR is when npv is 0 , so what is the investment part all about
This is only relevant if we are using the IRR in order to compare projects.
It would not be valid to compare (for example) an investment lasting 10 years with an IRR of 10% with an investment lasting 3 years with an IRR of 11% – it is not comparing like with like. You could only say for certain that the 11% project was better if we assumed that we would carry on getting 11% for ever because as we got the inflows we could then re-invest them to earn 11%.
This is only relevant in the exam for written questions. For calculation questions we do not make that assumption and when comparing projects we always choose the one with the higher NPV.
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