Capital budgeting - multiple IRRs

CFA Level I Corporate Finance
#1

X is concerned that this project has multiple IRRs.

year 0 1 2 3

CF -50 100 0 -50

How many discount rates produce a zero NPV ?

A. one, discout rate = 0

B. two, discount rate = 0 and discount rate = 32

C. two, discount rate = 0 and discount rate = 62

The answer is C, and explanation is - Discount rates of 0 and approximately 61.8 give a zero NPV.

Zero is okay but with discount rate of 62, the NPV is not zero.

I don’t know why the answer is C - they simply ask if it’s 0 or 62 - not appriximately 62 or closest to.

What is the reasoning behind this ?

#2

It’s a poorly written question, but not for the reason you cite. They mean 0_ % _ and 62_ % _, so they should say so; _ 62 _ is not (remotely) the same thing as _ 62% _.

Yes, it would have been better if they’d written approximately 62%.

Don’t give it another thought. Focus on things that matter; this doesn’t.

#3

Needed confirmation, thanks

#4

My pleasure.