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it is from Kaplan kit question 78
There is initial outflow of cash, several numbers of years of inflows with final outflow.
How many IRR it could be?
a) either 0 or two
b)either 1 or two
c)either 0, 1 or 2
d) only 2The correct answer is c, could you please, explain why?
As I explain in my free lectures, for every change in sign in the cash flows there is potentially one more IRR.
Here there is an outflow, then inflows, then an outflow. So there are 2 changes of sign (negative to positive, and then positive to negative) and therefore potentially 2 IRR’s.
However, although there could be as many as 2 IRR’s, the exact number depends on the size of the cash flows and there may be no IRR or there may be just 1 IRR. The size of the flows determines the shape of the curve and as to whether or not it crosses the axis.
If you have not already done so then do watch my free lectures on investment appraisal (and if necessary the relevant Paper MA lectures, because this is revision from Paper MA).
Thanks, I got it. Everything would depend on the size of inflows compared to outflows.
e.g initial 1M outflow, then 7 inflows of 20,000 and final outflow of 500,00 would never cross the line. So NPV would be always negative for the life of the project.
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