Read the first two paragraphs of Section 11-6. The difference between projects with normal and non-normal cash flows is important for the IRR calculation. Match each of the following descriptions with the cash flow type
- Produces multiple IRRs and a decision cannot be made without a modification of the IRR calculation
- Two or more changes of cash flow signs from positive to negative
- A Nuclear power plant that includes a significant upfront cost, a string of positive cash flows and then a cost to close the project
- A minerals mine that includes a few years of cost as production is initiated and then several years of positive cash flows followed by alternating years of positive and negative cash flows
- Cost (negative CF) followed by a series of positive cash inflows.
One change of signs
- Produces only one IRR that can be used for decision making
- A firm invests in new technology for several years resulting in negative project cash flows and then earns positive cash flows throughout the life of the project
- A production company has negative costs upfron while they customize their factory and then have positive cash flows after the first year while the factory is fully operational