Could somebody give an example of an investment scenario where the IRR is Zero? (No IRR and still the project may be profitable) This is in referance to LOS 44 am refering to 44.e
Lets think abou this. If the IRR is 0, why would they complete the project? Unless this this was the best mutually exclusive opportunity to improve operations, comply with regulations, etc. I don’t see why they would undertake the project when they could take the cash and invest it in savings to earn at least 3% interest.
the IRR is the discount rate that makes the NPV=0,i.e. no profit, and no loss. or the highest capital cost a project can bear in order to not loss money. in NPV profile, when IRR =0, the NPV is also 0, the curve is at origin. I hardly image that a project’s IRR is zero and profitable at same time. the LOS44.e is reading, " explain the NPV profile, compare and contrast the NPV and IRR methods when evaluating independent and mutually exclusive projects, and describe the problems that can arise when using IRR". no mention IRR=0. what’s your question acctually?
in order for a project to be profitable IRR has to be greater than the discount rate (WACC, etc). therefore, IRR = 0 will have NPV < 0 as long as RFR > 0
My question is related to the multiple IRR or No IRR problem. Schweser says, " It is also possible to have a project where there is no discount rate that results in a zero NPV, that is, the project does not have an IRR. A project with no IRR may actually be a profitable project. The lack of IRR results from project having non-normal cashflows, where mathematically, no IRR exists." This is what I don’t understand. (First paragragh in page 23, book# 4)
This doesn’t mean IRR = 0; it means there is multiple or no solutions that make NPV = 0. It still may be a profitable investment as NPV > 0 using their discount rate; you just can’t get a sensible solution from the IRR equation. Cash flows that go from positive to negative to positive, etc can cause the problem of having multiple IRRs solve the equation. kochunni69 Wrote: ------------------------------------------------------- > My question is related to the multiple IRR or No > IRR problem. > > Schweser says, " It is also possible to have a > project where there is no discount rate that > results in a zero NPV, that is, the project does > not have an IRR. A project with no IRR may > actually be a profitable project. The lack of IRR > results from project having non-normal cashflows, > where mathematically, no IRR exists." > > This is what I don’t understand. (First paragragh > in page 23, book# 4)
Thanks nringo. You sounds like a pro. Also, I admit my mistake of quoting “IRR = 0” What i meant is ‘No IRR’.
when you calculate IRR you assume that all cash flows are reinvested at IRR. There is always a solution for normal cash flows (one outflow//investment// at the beginning [one negative cash flow] and all other cash flows are inflows (positive cash flows)). IRR is a root of a polynomial (no analytical solution for large enough number of cash flows //don’t want to go into that). for non-normal cash flows, sometimes there is no solution or the corresponding polynomial doesn’t have a real root. anyway, for normal cash flows IRR can always be used. for non-normal cashflows it can not always be used.
Find IRR of the following Period 0= +100 Period 1= -200 Period 2 = +150 Edit: It’s undefined. Edit2: And NPV > 0 for all discount rates.
Thanks joey.