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The IRR is the rate at which NPV equals zero, and as you explained, we get this by computing two NPVs at two different rates, then interpolate.
But what does it mean when a project has “several IRRs”? I have no idea what that statement means.
Please explain.
For every change of sign in the cash flows, there is potentially (but not always) one more IRR.
Most projects have a negative flow followed by positive flows – so one change of sign and therefore one IRR.
If you have a project with negative flows followed by positive flows, and then followed by negative flows, then there are two changes of sign and it is possible that there are two IRR’s.
You cannot be required in the exam to calculate anything other than the normal IRR, but for written questions then just be aware of this.
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