Present Value Models and the Multi-Asset Problem: A Reply.

Abstract This article presents a response from the authors to the criticism of their article "Present Value Models and the Multi-Asset Problem," by Anthony J. Curley and Charles G. Carpenter, published in the October 1973 issue of the journal "The Accounting Review." Curley and Carpenter state that the analysis ignores the reinvestment problem. When the firm reinvests any portion of intermediate cash flows, the cash flows on which the firm's analysis of the internal rate of return (IRR) is based are defined net of reinvestment. But the problem of interpreting the firm's rate of return when the IRR is applied to individual assets would be the same under alternative reinvestment assumptions, even when the firm is considered in the context of a portfolio of assets. The portfolio rate of return is identical to the firm's rate of return obtained by aggregating the results of applying single-asset IRR models in the firm situation. Accordingly, the problem of interpreting the portfolio rate of return is no different than the problem which led the authors to conclude that the IRR is a firm model, not a single-asset model. Curley and Carpenter assert that the investment in monetary assets should be ignored in calculating the internal rate of return.