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Unformatted text preview: use them as a substitute for outside capital which costs 10 percent. Thus, since these cash flows are expected to save the firm 10 percent, this is their opportunity cost reinvestment rate. The IRR method assumes reinvestment at the internal rate of return itself, which is an incorrect assumption, given a constant expected future cost of capital, and ready access to capital markets. Answers and Solutions: 11 - 18...
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- Spring '08