Skip to content

CMA Intermediate · Financial Management and Business Data Analytics · Capital Budgeting

A project has cash flows of −₹1,00,000 at Year 0, +₹2,30,000 at Year 1 and −₹1,32,000 at Year 2. Which statement about its IRR is correct?

With two sign changes in the cash flows, the project can have multiple IRRs; here both 10% and 20% give zero NPV. Because IRR is ambiguous in such non-conventional projects, the Modified IRR, which gives a single value, is the preferable measure.

  1. AIRR can be multiple because the cash flows change sign more than once, so MIRR is preferableCorrect
  2. BIRR is unique because total inflows exceed outflows
  3. CIRR cannot be calculated for any project with a negative final cash flow
  4. DIRR must equal the cost of capital

Explanation

The signs go −, +, −, which is two sign changes, so up to two IRRs may exist (here 10% and 20%: at 10% PV = −100,000 + 209,091 − 109,091 = 0). Total inflow versus outflow does not guarantee uniqueness. MIRR uses a single reinvestment and finance rate and gives one answer.

Did you get it right without looking?

One question tells you little. A timed set on Capital Budgeting shows your real accuracy, how long you take and where you lose marks.

Practise Capital BudgetingFree diagnostic mock

More Capital Budgeting questions