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  1. avatar says

    Hi Sir,

    May I ask the reason why there might be more than 1 IRR for project? I don’t quite understand this part on the problem arising from IRR. May you please elaborate on this part? Since IRR is calculated using 2 cost of capital and then the formula using the linear relationship in fact it isn’t. But it does not explain that there might be more than 1 IRR unless you use a different discounting factor which might end up with a slightly different result?

    • Profile photo of John Moffat says

      If you draw a graph of the NPV against the rate of interest, then usually it is a downward sloping curve and there is just one IRR.
      However, you can have the situation when the curve goes upwards, then turns and goes downwards and crosses the axis twice – i.e. 2 internal returns.

      Basically, for every change of sign in the cash flows there is one more potential IRR.

      Usually there is an initial outflow followed by inflows – i.e. 1 change of sign, and therefore just 1 IRR.
      However, if there was an outflow followed by inflows then followed by another outflow, then there could be 2 IRR’s (there won’t necessarily be 2, but there could be).

      You will not be asked about this except insofar as it is one possible problem with using IRR’s.

      For more, you need to watch the F9 (and F2) lectures on IRR. However it isn’t really worth bothering about. The only place it stands to be relevant in P4 is a point that could be worth mentioning if you are every writing about the IRR. Yu are never asked any arithmetic on this point.

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