Would someone please explain this further - I got this one wrong; my only reason for my choice between either a or b was my calculator could compute b and not a. What is the diff between a and b? Q #88553 Qbank Which of the following cash flow streams is most likely to have multiple IRRs? Purchase Price Cash Flow 1 Cash Flow 2 A) $1.0 million $1.0 million gain $0.1 million expense B) $1.8 million $10 million gain $9 million expense C) $1.7 million $8.0 million gain $5 million gain Your answer: A was incorrect. The correct answer was B) $1.8 million $10 million gain $9 million expense When there is a reversal in the sign of the cash flows, it is likely that there will be multiple IRR solutions. In fact, for the cash flow stream {-1.8; 10; -9} the IRRs are 13 and 343%
calculator only gives you the lowest number… it will never show you both numbers. it is something you need to be aware of -> that the calc. will not give you both answers. recognize multiple changes of sign (direction change in cashflows) produces multiple IRRs.
but there is a sign change in A as well…
yes, understood. Choice a has a sign change as does choice b. Which is better? A: -1, 1, -0.9 B: -1.8, 10, -9 How is one to know that A will not give multiple solutions where B will?
but why is A and B different?
A has only one IRR which is negative. If you look at the cashflows, no matter what the discount rate, NPV would be less than zero. The only cash inflow is equal to the initial cash outflow. I think that may have something to do with it. B can actually have a positive NPV and IRR.
good answer job##### - i think you’ve got it.