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Understanding Multiple Internal Rate of Return Values in Non-Conventional Cash Flows

In cash flow analysis, multiple internal rate of return (IRR) values can occur when there are several sign changes in net cash flow, often labeled as non-conventional cash flows. Descarte’s rule indicates that the number of real IRR values cannot exceed the number of sign changes. Additionally, Norstrom’s criterion specifies that if the cumulative cash flow is negative initially and changes signs once, there will be only one IRR value. This discussion illustrates how to determine the maximum IRR values using given cash flow data.

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Understanding Multiple Internal Rate of Return Values in Non-Conventional Cash Flows

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  1. Multiple values of i may exist when there is more than one sign change in net cash flow(CF). Such cash flow is called non-conventional. Two rules apply to multiple i values: Descarte’s rule states that the number of real i values is less than or equal to the number of sign changes in net cash flow Norstrom’s criterion states that if the cumulative cash flow starts off negatively and has only one sign change, there is only one i value Multiple ROR Values

  2. Determine the maximum number of i values for the cash flow below Net cash flow Cumulative CF Year ExpenseIncome -12,000 -12,000 0 -12,000 - -14,000 -2,000 1 -5,000 + 3,000 -11,000 +3,000 2 -6,000 +9,000 +8,000 -3,000 3 -7,000 +15,000 +8,000 +5,000 4 -8,000 +16,000 -1,000 +4,000 5 -9,000 +8,000 The cumulative cash flow begins The sign on the net cash flow changes negatively with one sign change twice, indicating two possible i values Example-No. of i Values Solution: Therefore, there is only one i value( i = 4.7%)

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