NPV vs. IRR someone, discount, budgeting, sometimes, following

stronger

Could someone explain the following:

It is sometimes siad that NPV implicitly assumes that project cash flows can be reinvested at the discount rate used to calculate NPV.

If we were to rank projects by their IRRs, we would be implictly assuming that project cash flows could be reinvested at the project's IRR.

This is from Kaplan Capital budgeting page 25.

sdada

With NPV, you are using an interest rate to calculate a present value. The NPV calculatio n assumes that you reinvest all interim cash flows at the original interest rate to get the NPV answer.

With IRR, you are calculating what interest rate makes the present value of the series of cash flows equal to zero. The IRR calculation assumes that all reinvestments are made at the IRR to come to the NPV of zero.

Kiakaha

^I prefer IsleSea's explanation

Daniel1985

Understood. Thanks.