ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Net Present Value versus Internal-Rate of Return-Further Comment

Net Present Value versus Internal IN his reply to my comment (February 26, pp M-43-47), Paul Mampilly is right when ho states that the evaluation of an investment proposition should bo made on the basis of "the net change, increment or decrement, that particular proposition causes to the total finances of an investor over a chosen horizon of time", and that account mast be taken not only of what he calls 'primary flows' but also of the 'secondary flows' arising from re-investment of the primary flows. Mampilly argues at length that the reinvestment rate should be take into account for the purpose of investment evaluation and uses this argument as his main justification for the contention that the Internal Rate of Return (IRR) method implicitly assumes a re-invest- inent rate equal to the IRR itself. However, to argue that the actual re-investment rate should be taken into account for decision purposes is one thing; to say that a particular re-investment rata is implicit in the IRR method is quite another.

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