How many IRRs are possible for the following set of cash flows? CF0 = -1,000, CF1 = + 500, CF2 = -300, CF3 = + 1,000, CF4 = + 200.
A)1
B)2
C)3
D)4

Question

Quizplus · Accepted Answer

The number of possible IRRs for a set of cash flows corresponds to the number of times the cash flow changes sign. In this sequence, the cash flows change sign three times: from negative to positive between CF0 and CF1, back to negative between CF1 and CF2, and then back to positive between CF2 and CF3. According to the Descartes' Rule of Signs, each sign change represents a potential IRR, so there can be up to 3 IRRs for this set of cash flows.

How Many IRRs Are Possible for the Following Set of Cash