Question

When you calculate the Internal Rate of Return, what specific assumption are you making about where the cash earned by the project is reinvested?

Accepted Answer

When you calculate the Internal Rate of Return, or IRR, you assume that all the money the project earns along the way is immediately reinvested back into the exact same project at that same rate of return. Think of it like a magic bank account that pays a certain interest rate, where every dollar you take out is instantly put back in to earn that same high rate until the very end. This is a bold assumption because, in the real world, it is often impossible to find new projects that pay just as well as the one you are currently working on. If the project&#x27;s actual profit rate is very high, the math expects you to keep finding ways to earn that same high rate over and over again, even if better or safer options do not exist.

When you calculate the Internal Rate of Return, what specific assumption are you making about where the cash earned by the project is reinvested?

When you calculate the Internal Rate of Return, or IRR, you assume that all the money the project earns along the way is immediately reinvested back into the exact same project at that same rate of return. Think of it l....

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When you calculate the Internal Rate of Return, what specific assumption are you making about where the cash earned by the project is reinvested?

When you calculate the Internal Rate of Return, or IRR, you assume that all the money the project earns along the way is immediately reinvested back into the exact same project at that same rate of return. Think of it l....

Community Answers