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Again sir, as far as unconventional cash flows are considered, i know they yield 2 IRRs and have also seen the graphs which supports the aforementioned fact. But is there any logical/intuitive reason which could help me understand it, rather than just know it as a fact?
As I explain in my free lectures, it is not just 2 IRR’s – for every change of sign in the cash flows there is potentially (it depends on the amounts) one IRR. So there could be any number of IRR’s.
In a conventional set of cash flows i.e. an outflow followed by a series of inflows, then we are having to borrow money and so higher rates of interest mean a lower NPV. If the sign changes so that there inflows followed by outflows then we become a depositor of money and higher rate of interest means a higher NPV. So the shape of the curve changes every time the sign of the cash flows change and therefore potentially it can cross the zero NPV axis more than once.
Appreciate that in the exam you are expected to be aware that this possibility exists, but you cannot be expected to calculate multiple IRR’s.
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