Two Fellow Financial Analysts Are Evaluating a Project with the Following

question 55

Multiple Choice

Two fellow financial analysts are evaluating a project with the following net cash flows: $$\begin{array} { l l } \text { Year } & \text { Cash Flow } \\0 & \$ - 10,000 \\1 & 100,000 \\2 & - 100,000\end{array}$$ One analyst says that the project has an IRR of between 12 and 13%.The other analyst calculates an IRR of just under 800%, but fears his calculator's battery is low and may have caused an error.You agree to settle the dispute by analyzing the project cash flows.Which statement best describes the IRR for this project?

• A)There is a single IRR of approximately 12.7 percent.
• B)This project has no IRR, because the NPV profile does not cross the X axis.
• C)There are multiple IRRs of approximately 12.7 percent and 787 percent.
• D)This project has two imaginary IRRs.
• E)There are an infinite number of IRRs between 12.5 percent and 790 percent that can define the IRR for this project.

---

Definitions:

Buyer Bears

This concept refers to the condition in which the purchaser is responsible for any additional expenses that arise after a purchase agreement, such as repair or maintenance costs.

Price Wedge

The difference between the price paid by buyers and the price received by sellers, often resulting from taxes, subsidies, or other interventions in the market.

FICA

Stands for Federal Insurance Contributions Act, specific U.S. legislation that funds Social Security and Medicare through payroll taxes.

Seller Bears

Refers to situations where the seller is responsible for any additional costs or risks associated with a transaction.