Discounted cash flow methods and the fallacious reinvestment assumption: a review of recent texts

Differences in the assumptions relating to the reinvestment of intermediate cash flows have been offered as the explanation for the conflict that can arise between the net present value method and the internal rate of return method in the ranking of two projects. A review of the literature argues that this assumption is incorrect and thus cannot be an explanation for the conflict. This paper briefly discusses the conflict and presents the results of a survey into the incidence of the assumption in a sample of recent management accounting and finance texts. Seven-tenths of the texts we sampled relied on the fallacious assumption. We offer tentative explanations as to why the fallacious reinvestment assumption is invoked.