Two fellow financial analysts are evaluating a project with the following net cash flows: One analyst says that the project has an IRR of between 12 and 13%.The other analyst calculates an IRR of just under 800%, but fears his calculator's battery is low and may have caused an error.You agree to settle the dispute by analyzing the project cash flows.Which statement best describes the IRR for this project?

Question

Two fellow financial analysts are evaluating a project with the following net cash flows:  One analyst says that the project has an IRR of between 12 and 13%.The other analyst calculates an IRR of just under 800%, but fears his calculator's battery is low and may have caused an error.You agree to settle the dispute by analyzing the project cash flows.Which statement best describes the IRR for this project?

Quizplus · Accepted Answer

The project cash flows have both positive and negative values. The NPV profile of the project should have at least two points where the NPV equals zero. As stated by the first analyst, there is an IRR between 12 and 13 percent. The second analyst's calculation of an IRR just under 800% does not make sense given the size and timing of the cash flows. However, the fact that the calculation yielded a positive value suggests that there is likely another IRR around that magnitude. Therefore, there are multiple IRRs of approximately 12.7 percent and 787 percent.

Two Fellow Financial Analysts Are Evaluating a Project with the Following