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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 return (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 $4.83m
The 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.
Which TWO of the following statements represent likely causes of confusion over
project F?
A It has a negative NPV when undiscounted
B It never earns a positive NPV
C It has no real IRRs
D It has one positive and one negative IRR
E It may have more than one IRR(Ans) A, E
Dear Sir,
I understood “why” the answer is A and E
I just wanted to know what does option C and D mean? What is positive and negative IRR?
Kindly explain
Thanks a lotA: If the flows are not discounted (i.e. the interest rate is 0%) then the NPV is 8.80 – 4 – 4.83, which is negative.
E: as I explain in my free lectures, for every change of sign in the cash flows then there is potentially one more IRR. Here the sign changes twice and therefore there are potentially two IRR’s.
C and D: IRR’s are never negative which is why those answers are not correct answers.
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