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Q.A company is considering a two year project which has two annual internal rates of return namely 10% and 25%.The sum of the undiscounted cash flows is positve.
The project will necessarily have a positive net present value, when the annual cost of capital is
A. More than 25%
B. More than 10%
C. Between 10% and 25%
D. Less than 25%Answer given is A but I have no clue how do we arrive at this answer…
Need ur help…Because there are two IRR’s it must mean that the cash flows are negative at time 0, positive at time 1, and then negative at time 2. (I explain this bit in my free lectures)
Because it is negative at time 0 and positive at time 1, this bit is like a conventional project – the NPV will be positive below 10% and then negative above 10%.
However between time 1 and time 2, the situation is the other way round (because the cash flow is positive at time 1 and negative at time 2).
So the NPV will be negative below 25% and then positive above 25%.
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