Abstract
ABSTRACT Consistent with financial theory, this paper recognizes that under perfect capital markets the correct reinvestment rate in DCF models is the market-determined cost of capital. It is shown that using other rates is unnecessary and distorts capital project value. The paper evaluates the bias Inherent in the use of explicitly stated reinvestment rates other than the cost of capital. The bias is shown to depend on the reinvestment rate, the cash flow pattern, and project life.
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