is this question right ??? following, question, multiple, correct

burnsy562000

Which of the following cash flow streams is most likely to have multiple IRRs?
Purchase Price Cash Flow 1 Cash Flow 2
A) $1.0 million $1.0 million gain $0.1 million expense
B) $1.8 million $10 million gain $9 million expense
C) $1.7 million $8.0 million gain $5 million gain
Your answer: C was incorrect. The correct answer was B) $1.8 million $10 million gain $9 million expense
When there is a reversal in the sign of the cash flows, it is likely that there will be multiple IRR solutions. In fact, for the cash flow stream {-1.8; 10; -9} the IRRs are 13 and 343%.

torontoanalyst

B is right.
not see any problem on the explanation. high nagitive cash flow will cause mutiple IRR since the “fuction” will have 2 values.
BTW, the “function” is the Quadratic Equation used in discounting NPV and IRR.

morebeans

ya not A then u have 2 -ve signs in that too… when we have multiple times cash outlays we will have multiple IRR.. that’s my understanding is…. OR it is dependend on the size of the outlay as u said?

CFA4Techie

it is not solely the size of the outlay
you may calc if you wish:
for A): -
NPV = -1.0 + 1.0/(1+x) + (-0.1)/(1+x)^2
Let NPV = 0 we get IRR.
so we need to solve this Quadratic Equation.
for y=ax^2+bx+c
we have x1=(1/2a)*(-b +(b^2-4ac)^0.5) AND x2=(1/2a)*(-b -(b^2-4ac)^0.5)
just solve it. if you get two different but meaningful X , that is multiple IRR