explanation is vague - please help! How do you figure out the IRR of 260?
Which of the following statements about the internal rate of return (IRR) for a project with the following cash flow pattern is CORRECT?
It has two IRRs of approximately 38% and 260%.
It has a single IRR of approximately 38%.
No IRRs can be calculated.
The number of IRRs equals the number of changes in the sign of the cash flow. In this case, from negative to positive and then back to negative. Although 38% seems appropriate, one should not automatically discount the value of 260%.
Check answers by calculation:
10,000 ÷ 1.38 - 10,000 ÷ 1.382 = 1995.38
10,000 ÷ 3.6 - 10,000 ÷ 3.62 = 2006.17
Both discount rates give NPVs of approximately zero and thus, are IRRs.