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nitoha

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tT
发表于 2013-4-6 22:24 | 只看该作者

How do you solve this IRR question?

300, following, question, identify
Two projects have the following cash flows:
Time 0 1 2
Project A 100 275 300
Project B 100 300 200
The internal rate of return (IRR) problem most likely to emerge with each project’s cash flow is:
a. Both projects have a multiple IRR problem.
b. Project A has a multiple IRR problem, Project B has no IRR.
c. Project B has a multiple IRR problem, Project A has no IRR.
How do you identify which project has a multiple IRR or no IRR?
I’ll post answer shortly. Thanks!
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prav_Cfa7

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2#
发表于 2013-4-6 22:25 | 只看该作者
c
Project B has multiple neg CFs  so pot. multiple IRRs
Project A has none…as initial CF is a +ve one

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kkn006

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3#
发表于 2013-4-6 22:25 | 只看该作者
I think it’s A.
I think it is when the sign of the cash flow changes more than once, can someone elaborate?

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orang3eph

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4#
发表于 2013-4-6 22:25 | 只看该作者
Then when will a project have no IRR?

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bleach

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5#
发表于 2013-4-6 22:25 | 只看该作者
Project A has multiple.
B has one IRR = 0
Can’t you check this by putting CF’s into your calc? If it errors you have multiple IRR’s.

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Chuckrox

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6#
发表于 2013-4-6 22:25 | 只看该作者
And the answers is, C.
This was in Stalla’s practice exam #3 with the following explanation  “Two values of IRR satisfy the cash flow pattern in Project B (0% and 100%), giving rise to the multilpe IRR problem. No values of IRR (“no IRR” problem create a zero NPV for the cash flow pattern in Project A.”
Looks as though this would fit with ov25’s description. Anyone want to elaborate?

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RealEstate_CFA

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7#
发表于 2013-4-6 22:26 | 只看该作者
A

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tarunajwani

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8#
发表于 2013-4-6 22:26 | 只看该作者
I think that the consensus is that generally with a more than one sign change in the cash flows, multiple IRRs exist. I am sure on the exam, it will be more straight forward than this question, as it is a bit complex when compared to the principle the CFAI is trying to teach: multiple sign changes = multiple IRRS.
Everyone agree?

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