Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 226

Solution to Reinvestment Rate Problem

Cash Flow

Investment

$ 300 $^400 $^500 $^600

<$ 1000 >

$ 300 ( 1. 15 )^3

$ 400 ( 1. 152 )

$ 500 ( 1. 15 )

$ 600

$ 575

$ 529

$ 456

Terminal Value = $ 2160

Internal Rate of Return = 24. 89 %

Modified Internal Rate of Return = 21. 23 %

This is the modified IRR. Its rankings are going to be very similar to those

yielded by the PI approach.