Two fellow financial analysts are evaluating a project with the following net cash flows: Year
Cash Flow
0
−$10,000
1
100,000
2
−100,000
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?
A) There is a single IRR of approximately 12.7 percent.
B) This project has no IRR,because the NPV profile does not cross the X axis.
C) There are multiple IRRs of approximately 12.7 percent and 787 percent.
D) This project has two imaginary IRRs.
E) There are an infinite number of IRRs between 12.5 percent and 790 percent that can define the IRR for this project.

Question

Quizplus · Accepted Answer

The project has non-conventional cash flows (an initial outflow followed by an inflow and then another outflow), which can lead to multiple IRRs. The first analyst's estimate falls within a typical range for many projects, while the second analyst's very high IRR is also possible due to the cash flow pattern. This scenario can result in multiple IRRs, one being around 12.7% and another being very high, close to 787%, as indicated by the second analyst.

Two Fellow Financial Analysts Are Evaluating a Project with the Following