Continue from Example 1-1. What if Mr. Thompson uses his revenues from the join venture project to invest in another project?
This is a realistic problem since nobody keeps substantial amount of cash in the drawer for a long period of time. He must either spend it or save it in his bank account. In addition, this problem also reminds us not to be fooled by the financial parameters obtained from the Discounted Cash Flow ROR (DCFROR) analysis. The answer: If Mr. Thompson does keep his revenues from the project in the drawer year after year, the net equivalent NPV would be $5,949 instead of $8,636 as in Example 1-1. And the Modified IRR will be 6.78%. However, if he reinvests to another project with the same IRR of 10.14% (input this number in the Minimum Reinvestment Rate box), then the Modified IRR will remain the same as 10.14% and the equivalent NPV will increase to $13,338. This is an interesting financial problem worth thinking over. Try plugging in different expected reinvestment rates of return and see the different results. Also refer to Example V-2.