Question

Question 40 (1 point) The cost of investment is $1000 at time 0, the cash flow in year one is $2500, cash flow in year two is $3000 (negative cash flow), and the cash flow is $4000 in year three. Using the Descarte's rule of sign, what is the number of potential internal rates of return (IRRs) for the project? O 1) 3 oro O 2) 2 3) 1 4) 3 or 1 5) 2 or 0

Answer 1

IRR is the Rate at which NPV = 0

Therefore,

-1000/[(1+IRR)^0] + 2500/[(1+IRR)^1] - 3000/[(1+IRR)^2] + 4000/[(1+IRR)^3] = 0

Let 1/[1+IRR) be x

Therefore, 4000x3 - 3000x2 + 2500x1 - 1000 = 0

There are 3 sign changes.

Descarte's Rule: Number of Possible Positive solutions for a polynomial are, Number of sign change or Number of sign change - 2 or (keep reducing by 2 until 1 or 0)

Therefore, As per Descarte's rule, there are 3 or 1 potential IRRs