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A sixth project, Project F, is causing considerable confusion, particularly among those members of the board of Easter Co whose sole means of appraising projects is to find an internal rate of rate (IRR) using the spreadsheet function on their computers. The summarised cash flows of Project F are as follows.
Time 0 Invest $4.00m
Time 1 Receive $8.80m
Time 2 Spend $4.83mThe spreadsheet function requires you to enter the cash flows of a project and also enter a guess for the IRR. The directors are struggling to guess the IRR for this sixth project.
What is the likely cause of confusion over project F?
Ans: It has two positive IRRsSir can u pls explain this answer to me. I don’t understand this. Thanks!
Every time there is a change in sign in the cash flows, there is potentially (but not always) one more IRR.
Most projects involve an outflow (negative flow) followed by inflows (positive flows), so the sign only changes once and there is just one IRR.
This project has an outflow (negative flow) followed by an inflow (positive flow) followed by another outflow (negative flow) and therefore the sign changes twice, which means there are potentially two IRR’s. (You would not be expected to calculate them when there is more than one, but could be expected to be aware of the problem.)
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