1.) Which of the following project(s) may have more than one IRR? year 0 1 2 3 4
ID: 2757944 • Letter: 1
Question
1.) Which of the following project(s) may have more than one IRR?
year
0
1
2
3
4
5
6
7
A
-1,000,000
230,000
340,000
90,000
120,000
180,000
200,000
80,000
B
-500,000
230,000
450,000
-120,000
340,000
330,000
-80,000
-20,000
C
-200,000
120,000
110,000
340,000
10,000
90,000
34,000
-100,000
A only
A and B only
B and C only
A and C only
all of the three
year
0
1
2
3
4
5
6
7
A
-1,000,000
230,000
340,000
90,000
120,000
180,000
200,000
80,000
B
-500,000
230,000
450,000
-120,000
340,000
330,000
-80,000
-20,000
C
-200,000
120,000
110,000
340,000
10,000
90,000
34,000
-100,000
Explanation / Answer
The formula for IRR is:
0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
where P0, P1, . . . Pn equals the cash flows in periods 1, 2, . . . n, respectively; and
IRR equals the project's internal rate of return.
A general rule of thumb is that the IRR value cannot be derived analytically. Instead, IRR must be found by using mathematical trial-and-error to derive the appropriate rate.
Year A B C 0 (1,000,000) (500,000) (200,000) 1 230,000 230,000 120,000 2 340,000 450,000 110,000 3 90,000 (120,000) 340,000 4 120,000 340,000 10,000 5 180,000 330,000 90,000 6 200,000 (80,000) 34,000 7 80,000 (20,000) (100,000) IRR 6.61% 38.41% 63.51%Related Questions
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