Question

If the sign of the cash flows for a project changes two times, then the project...

If the sign of the cash flows for a project changes two times, then the project likely has _______
Group of answer choices are below. Please explain why.

one IRR

two IRRs
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Answer #1

Option B is correct: two IRRs

If the sign of the cash flows for a project changes two times, then the project likely has two IRRs. This is because when the sign of the cash flows changes two times, then the NPV will be positive for a range of IRRs, not just a single rate of return.

Example: If the annual cash flows are as below, then the project likely has two IRRs

-1,000, 300, 300, -100

The first sign change happens from year 0 to year 1 cash flow

The second sign change happens from year 2 to year 3

This project will have two IRRs

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