Discussion
Match the method with the reinvestment rate it assumes.
1. Present worth 2. Internal rate of return 3. Modified rate of return
P. The computed rate itself Q. The minimum attractive rate R. An explicitly stated external rate
Answer: C
Correct answer: 1-Q, 2-P, 3-R
Every discounting method carries a reinvestment assumption, stated or not. Present worth assumes intermediate receipts earn the minimum attractive rate, which is usually reasonable. The internal rate assumes they earn the computed rate itself, which for a project returning 60 per cent is optimistic. The modified rate exists precisely to make that assumption explicit and defensible.
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