Given the following cash flow, what does Descartes’ Rule tell us about the IRRs of this...

Question

Question

Given the following cash flow, what does Descartes’ Rule tell us about the IRRs of this project?

EOY	Net CF	There are 3 possible IRRs
0	-10,000	There are 2 possible IRRs
1	2,000	There is 1 possible IRR
2	4,000	There are 0 IRRs
3	-5500	A and B
4	6000	A and C
5	4000	None of the above – you must solve for the IRR

Answer 1

Answer #1

Correct option is (a).

As per Descartes rule of sign,

Number of IRR = Number of change in sign of cash flow

In this case, there are 3 changes in sign of cash flows: Year 0 to Year 1 (- to +), Year 2 to Year 3 (+ to -), Year 3 to Year 4 (- to +).

Answer 2

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