Is there an implied reinvestment assumption in the mathematics of NPV and the discounting process? In other words, when we discount future cash flows, do we implicitly assume those cash flows will be reinvested at that same discount rate for the life of the asset/project in question?
I have seen conflicting arguments in different financial textbooks.
I know this is often brought up when comparing IRR and NPV (and when looking at the YTM of bonds), but some financial textbooks argue that while this reinvestment assumption does exist in IRR and YTM, it does not apply to NPV. This seems odd since the methods are mathematically equivalent.
If we do assume reinvestment of all cash flows, what does that say about dividends and free cash flows? Are we assuming that those cash flows will never be used for anything else but reinvestment? If this is true, it sounds very strange.
