For the net cash flow series shown, (a) apply the two rules of sign change, (b) find the external rate of return using the ROIC method at an investment rate of 15% per year, and (c) determine an i* using the IRR function with and without the ROIC determined in part (b).
 FIGURE 1.png)
(a) Cash flow rule of signs: up to three rate of return values.
Cumulative CF test: inconclusive; S0 > 0; series changes signs multiple times
(b) Calculate i" with ii = 15% per year
F0 = 48,000 F0 > 0, use ii
F1 = 48,000(1.15) + 20,000 = 75,200 F1 > 0, use ii
F2 = 75,200(1.15) - 90,000 = -3520 F2 < 0, use i?
F3 = -3520(1 + i?) + 50,000 = 46,480 -3520i? F3 > 0 for i? < 1320%; use ii
F4 = (46,480 – 3520i?)(1.15) -10,000
= 43,452 – 4048i?
Set F4 = 0 and solve for i?
0 = 43,452 – 4048i?
i? = 10.73 (1073%)
(c) With NCF values in cells B2 through B6, both functions = IRR(B2:B6) and
= IRR(B2:B6,1073%) display i* = -26.8%
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