13. The IRR calculation will general more than one answer when a. The dividend p
ID: 2730251 • Letter: 1
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
d. The cash flow pattern of the investment is characterised by cash flows which alternate between negative cash outflows and positive cash inflows
Reason: More than one rate of return (IRR) from the same project that make the net present value of the project equal to zero. This situation arises when the IRR method is used for a project in which negative cash flows follow positive cash flows. For each sign change in the cash flows, there is a different rate of return.In such a case Net Present Value(NPV) method should be used to evaluate the project.
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