How do you solve this IRR question? problem, multiple, identify, question, following

ikoreaii

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!

ishfaque

The answer is C.

Earlier in this thread "cpl123" did some maths and showed that B has IRR values of 0% and 100% and so has multiple(2) real values.

For the solution for A, he left the formulation as a quadratic equation which has 2 roots but both roots are imaginary so no real roots.

Mechanic

jblamb - I took your approach and got this wrong.

mnieman

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.

dontknow1987

Then when will a project have no IRR?

waldziuchna

I think it's A.

I think it is when the sign of the cash flow changes more than once, can someone elaborate?

Siddimaula

With every change in the number being positive or negative, that's how many IRRs you will have.

So, project A goes from 100 (positive) to -275 (negative) and back to 300 (positive). So it has two IRRs

Same idea for project B.

Hope that helps.

Penny-wenny

c

Project B has multiple neg CFs - so pot. multiple IRRs
Project A has none...as initial CF is a +ve one