One potential criticism of the net present value technique is that there is an implicit assumption that

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One potential criticism of the net present value technique is that there is an implicit assumption that this technique assumes the intermediate cash flows of the project are reinvested at the required return. In other words, if you calculate the future value of the intermediate cash flows to the end of the project at the required return, sum the future values, and find the net present value of the two cash flows, you will get the same net present value as the original calculation. If the reinvestment rate used to calculate the future value is lower than the required return, the net present value will decrease. How would you evaluate this criticism?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Future Value
Future value (FV) is the value of a current asset at a future date based on an assumed rate of growth. The future value (FV) is important to investors and financial planners as they use it to estimate how much an investment made today will be worth...
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Corporate Finance Core Principles and Applications

ISBN: 978-0077905200

3rd edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford

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