IRR

The IRR is not really a rate of return at all – it is simply the rate of interest when the NPV is zero.

Most times we are dealing with investments which require an initial outflow followed by inflows and for these, the greater the interest the lower the NPV – at low rates it is positive and at high rates it is negative.

However, if there was the situation where there was an initial inflow followed by outflows, then it would be the other way round – at low rates of interest the NPV would be negative and at high rates it would be positive.

Multiple IRR’s can happen (but don’t always happen – it depends on the amount of the flows) when you have outlaws, then inflows, then outflows. It is effectively a combination of the two situations above. So for some ranges of rates of interest, higher interest means lower NPV and for other ranges of rates of interest, higher interest means higher NPV.
That is what is happening in the example you describe.

In the exam you cannot be expected to calculate IRR’s in this situation. All that can be expected is that you can state it as one of the problems with IRR’s in a written part of a question.

You are welcome – I am pleased that it makes sense 🙂