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2N4.2
2.  When is it safe to use IRR to choose between two projects?

a. Tell me what conditions would have to be satisfied in terms of the cashflows of the two projects. (2 pts)

  1. There is no size disparity: both projects have the same initial investment
  2. There is no timing disparity: both projects have cash flows at the same intervals
  3. There is no "different lives" problem: both projects last for the same amount of time.
  4. Neither of the projects' cash flows changes signs more than once.

b. Use the table below to show me a set of cashflows for projects A & B that would allow you to safely use IRR to choose between them. (1 pt)

There are an infinite number of possible solutions. One of them is:
 

  Year 0 1 2 3
Project A -100 100 100 100
Project B -100 150 150 150

 

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