Multiple IRR

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satyaa

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When a project has multiple cash inflows during its life we have Multiple IRR for the project.

How can we calculate the multiple IRR using our financial calculator (I know how to calculate single IRR). What changes do we need to make in case we want to see both the IRR's (I have Texas Instrument BAII Plus).

Thanks
 
Don't think its possible, though I'll be happy if someone proves otherwise.
 
You do not need to know how to do that. I think the only way to do it is with an excel worksheet.
 
This is a very simple question:

What is the internal rate of return for a project with the following cash flow pattern?
� Year 0: -$ 2,000
� Year 1: $ 10,000
� Year 2: -$ 10,000
A) It has a single IRR of approximately 38 percent.
B) It has two IRRs of approximately 38 and 260 percent.
C) It has a single IRR of approximately 260 percent.
D) No internal rates of return can be calculated.

If you solve this you get an IRR opf 38% (option A). But having multiple cash inflows (negative cash flows) would imply more than one IRR. in that case how can we say that option B is not possible?

Thanks
 
first of all financial calculator makes error when there is non normal cash flow(-ve cash flow during or at end of project's life). though u got 38% answer when 2nd years cash outflow is -10000. just try calculating irr by using 2nd years cash flow equal to -5000. the answer is -43.65%. so calculator shows higher IRR(38%) when higher cash outflow(-10000) and lower IRR when lower cash outflow(-5000), which logically is not possible.

more over 260% return is impossible since there are not substantial cash inflows from project(10000 inflow in year 1 is offset by 10000 outflow in year 2).

so option A, B and C are wrong. D is right, project has multiple IRRs but they cannot be calculated.
 
To your question i know 260% in the above question is impossible. My concern was say if you had options of 38% and 42% for IRR how can you calculate them using your calculator.

I am not sure why you chose option (D) that IRRs cannot be calculated. Lets look at the above question for IRR calculation again:

-2000 + (10,000(1+r)) - (10000/(1+r)^2) = 0

rearranging the terms and assuming (1/(1+r)) = x, the above equation becomes:

10,000x = 2000 + 10,000x^2

Now this is a quardratic equation which has a solution.
 
If you solve that equation further:

x = -10 + ((100 - 4*10*2)^(0.5))/20 and

x = -10 - ((100 - 4*10*2)^(0.5))/20

The second solution is infeasible but the first equation will give you 38.2% as the answer.
 
ya it is quadratic equation, but u have messed up with signs

10000x^2-10000x+2000=0
10x^2-10x+2=0
for equation ax^2+bx+c=0, two solutions are x=(-b+(b^2 -4ac))/2a , x=(-b-(b^2 -4ac))/2a
for us a=10 , b=-10, c=2; substuting them in equations of two solutions we get:

x = (10 + ((100 - 4*10*2)^0.5))/20 and

x = (10 - ((100 - 4*10*2)^0.5))/20

first equation gives x=0.72361=1/(1+r) and therefore r=38.2%

second equation gives x=0.27639 and therefore r=261.8%

so B should be the answer two IRR of approximately 38% and 262%

and this can be done manually and not by using IRR feature of calculator. so solving the equation defeats apparent logic just by seeing cash flows. so i take back my previous comments and i yield to equations!!!!!!!!!!!
 
Thanks for correcting the signs. Hope they don't check these in exams when calculators fail. I came across this (so called) basic questions in Schweser Pro .

Thanks
 
This is a "basic" question...haaaaaaaa...all sorts of awesome shite.

Quadratic equation - oh f*ck, there's one I haven't seen in, oh, ABOUT 10 YEARS!
 
Zimzim,

Beleive it or not, it is under the basic question category in SchweserProCd (2005 version). I just hope they don't have questions like this for the exam where calculators fail.
 
Guys, while NPV and IRR will most assurdedly be on the test, I would be very surprised if they had you do calculations involving non-normal cash flow. Just know that a drawback of the IRR is that non-normal cash flows can produce multiple IRRs.
 
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