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Q) A company is considering a project that has an initial outflow followed by several years of
cash inflows, with a cash outflow in the final year.How many internal rates of return could there be for this project?
A Either zero or two
B Either one or two
C Zero, one or two
D Only two
C is the right answer.
Hello tutor!!
My question is why not the correct answer is D and why C ?
Because if signs of cash flows changes two times than it means there would be 2 IRRs but they are saying Zero and One IRR can also be form so how is this possible for any project to be WITHOUT IRR and how it is possible for a project which have 2 times signs change to have only One IRR ?C is indeed the correct answer.
As I explain in my free lectures, because the directions of the cash flows changes twice, the curve will change direction. That means that there are potentially 2 IRR’s but there do not have to be two places where the curve crosses the axis.
Consider this:
0 outflow of (20,000)
1 inflow of 1,000
2 outflow of (2,000)It is an extreme example, but even so. Although there are two changes of sign the NPV will be negative at all rates of interest – there is therefore no IRR.
Thank you sir I clearly understand your example.
However, could you please give me one more example of non-conventional cash flows with single IRR please so that I will understand properly.Here you are:
0 outflow of (10,000)
1 inflow of. 12,000)
2 outflow of. (1)There is only one IRR which is 20%
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