Which of the following statements about the internal rate of return (IRR) for a project with the following cash flow pattern is CORRECT?
Year 0: -$ 2,000
Year 1: $10,000
Year 2: -$ 10,000
A) It has two IRRs of approximately 38% and 260%.
B) No IRRs can be calculated.
C) It has a single IRR of approximately 38%.
-----------------------------------------------------------------------
The number of IRRs equals the number of changes in the sign of the cash flow. In this case, from negative to positive and then back to negative. Although 38% seems appropriate, one should not automatically discount the value of 260%.
Check answers by calculation:
10,000 |