Capital budgeting confusion!!!!

It probably means that ur discount rate & reinvestment rate are equal and ur position is same as it was earlier ie before considering reinvestment.

Say u discount my 10%.Now u consider Reinvestment @ 10%(Discount rate) ull land up @ original position.

Say discount by irr but consider reinversment @ other than different rate ur original position deviates.

Inferences i can draw from  this theory,it simply says tat the CF's from Reinvestment wil not affect ur Present value.

So it assumes only rates of discounting will considered as rates of reinvestment so that ur original present value doesnt deviate.

Let me giv u example

Let us assume that a project involving outflow of Rs. 50 at T=0 having Inflow each year of rs. 25 at the end for 3 years each. if u compute NPV at 5%  then ans. is Rs. 18.08.

Now, ur lines say that Inflows must be reinvested at Disc Rate of 5%. If we do so then we will get after 3 years the amt. = (25*1.05*1.05) + (25*1.05)+ (25)= 78.8125. Also, we have Invested the rs. 50 which will become 50*1.05*1.05*1.05= 57.8812. The net Cash at T=3 is 20.9312

If u compute the presetn value of this Rs. 20.9312, then it is equal to 18.08. So, it imlies that Reinvestment is automatic & required part of project. If we do not reinvest at 5%, then we wouldn't be getting value ocomputed by NPV method

Same is case with IRR method.

Thank you @ CA finalist and @ sahil sir for your answers...and sahil sir this example really helped me a lot....I have one more question sir.....Why is NPV method preffered over IRR if the case is same with IRR??

I read somewhere projects with heavy cash flows in early years will be favoured by IRR method(HOW COME?)

if this is explained with example then whole concept will be cleared...Thanks again

Book says that NPV will be preffered over IRR b'coz NPV gives value in absolute terms (say surplus) but IRR is point of NPV=0.Also,IRR is computed with the help of NPV.This suggest that NPV is superior and should be prffered over IRR..

Though i have confusion over the above discussed topic but it was what i understood..