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Ch13 Non-Normal Projects and IRR

# Ch13 Non-Normal Projects and IRR - Financial Management...

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© 2011 Dr. William F. Rentz & Associates, All Rights Reserved 1 Financial Management Chapter 13 Non-Normal Projects and IRR ADM 2350 Prepared by Dr. William F. Rentz, Ph.D., LIFA

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© 2011 Dr. William F. Rentz & Associates, All Rights Reserved 2 IRR Difficulties: Chapter 13 The traditional IRR rule is incorrect when cash inflows are followed by cash outflows – a non-normal project When there are multiple sign changes, there can be multiple positive IRRs and IRR is useless
© 2011 Dr. William F. Rentz & Associates, All Rights Reserved 3 Example of Non-Normal Project Project A: \$1M inflow followed by outflows of \$162,745 for 10 years Project B: \$1M inflow followed by outflows of \$135,868 for 10 years

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© 2011 Dr. William F. Rentz & Associates, All Rights Reserved 4 Calculation of IRR for Project A Consult a PVIFA table to see that r = 10%. With a BAII+, P/Y = C/Y = 1, N = 10, PV = 1,000,000, PMT = -162,745, FV = 0, CPT I/Y = 10.00. 145 . 6 745 , 162 \$ 000 , 000 , 1 \$ 0 000 , 000 , 1 \$ 745 , 162 \$ 10 , 10 , = = = + × - r r PVIFA PVIFA

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Ch13 Non-Normal Projects and IRR - Financial Management...

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