13. The IRR calculation will general more than one answer when a. The dividend p

Question

13. The IRR calculation will general more than one answer when a. The dividend policy of the firm isn’t clear and shows high variability in payouts between years b. The cash flow pattern of the investment is characterised by a negative cash outflow in year zero followed by positive cash inflows in the outer years c. The IRR of the project exceeds the Weighted Average Cost of Capital d. The cash flow pattern of the investment is characterised by cash flows which alternate between negative cash outflows and positive cash inflows e. The degree of leverage employed by the firm is sub-optimal, i.e. its weighted average cost of capital is higher than it should be

Explanation / Answer

The cash flow pattern of the investment is characterized by cash flows which alternate between negative cash outflows and positive cash inflows is correct.

When the cash flow pattern is conventional that means there is only one cash outflow in the beginning and it is followed by a series of positive cash inflows, there would be only one IRR. Whereas when the cash flow pattern is unconventional, that is when there is more than one cash outflow, there can be more than one IRR. This happens due to reinvestment assumption of IRR criterion.

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