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A company is considering a project that has an initial outflow follow by 7 years of cash inflows, with the cash outlw in final year,
There should be 2 IRR for the project.
Why is that and how do we know how many IRR the project should have?Every time the sign of the cash flows changes (from positive to negative, or from negative to positive) then there is potentially one more IRR. There will not always be one more, but potentially there may be.
Most projects just have an outflow and then inflows, so the sign only changes once and there is only one IRR.
In your example, there is an outflow then there are inflows and then there is an outflow. So the sign changes twice and there might be 2 IRR’s (although that is not certain to be the case).
I do explain the reason for this in my free lectures (although you are not expected to calculate multiple IRRs in the exam).
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