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Sir,
1) what is decision rule and why IRR decision rule is note clear cut???
2) how a project can have multiple IRR
Generally, a project should be accepted if the IRR is great than the cost of capital. That is the decision rule, but it is not clear cut because on occasions there can be more than one IRR.
There is potentially one IRR for every change of sign (positive to negative or vice versa) of the cash flows.
Most projects have an outflow followed by inflows – so one change of sign and therefore one IRR.
However, if there was an outflow followed by inflows followed by another outflow, then there are two changes of sign. Therefore there are potentially (but not necessarily) two IRR’s.This is explained in my free lectures (and in the Paper FM (F9) lectures, because this is revision from the earlier FM exam.
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