Would someone please explain this further - I got this one wrong; my only reason for my choice between either a or b was my calculator could compute b and not a. What is the diff between a and b?
Q #88553 Qbank
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: A 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%作者: onelife1 时间: 2011-7-11 19:50
calculator only gives you the lowest number....
it will never show you both numbers.
it is something you need to be aware of -> that the calc. will not give you both answers.
recognize multiple changes of sign (direction change in cashflows) produces multiple IRRs.
CP作者: RepoToronto 时间: 2011-7-11 19:50
yes, understood. Choice a has a sign change as does choice b. Which is better?
A: -1, 1, -0.9
B: -1.8, 10, -9
How is one to know that A will not give multiple solutions where B will?作者: scarecrow 时间: 2011-7-11 19:50
but why is A and B different?作者: yalo 时间: 2011-7-11 19:50
A has only one IRR which is negative. If you look at the cashflows, no matter what the discount rate, NPV would be less than zero. The only cash inflow is equal to the initial cash outflow.
I think that may have something to do with it. B can actually have a positive NPV and IRR.作者: tarunajwani 时间: 2011-7-11 19:50
