Project with no IRR may be actually a profitable project ?

CFA Level I
#1

Hi All,

I didn’t understand the following statement in Corporate Finance’s Capital Budgeting chapter.

It says, " Project with no irr can actually be a profitable project".

How can that be possible ? Explanation with an e.g would be appreciated.

Thanks

#2

Suppose that you have a project with these cash flows:

Year 1: $200,000

Year 2: -$600,000

Year 3: $500,000

It’s a profitable project - if your discount rate is 0% the NPV is $100,000; if your discount rate is 10% the NPV is $67,769 - but there is no IRR.

This is one of the reasons that MIRR is preferred to IRR.