IRR problem The likelihood of a cash flow that has lots of IRRs occuring in real life

Thomas Fry

New member
Joined
Apr 27, 2018
Messages
1
Hi, I'm kind of confused with this question, realistically speaking, i think many projects undergoes the process of initial investment (- cash outflow), make profit (+ cash inflow), fee for repairing or substitute product due to depreciation (- cash outflow), make profit (+ cash inflow), fee for repairing (-), make profit (+)........and this process repeats. so it sounds like it is realistic to have 10 or 20 IRRs in a real life cash flow. But i also feel like it doesn't really make sense for a real life cash flow to have infinite IRRs.... Plz help me...
 
........and this process repeats. so it sounds like it is realistic to have 10 or 20 IRRs in a real life cash flow. But i also feel like it doesn't really make sense for a real life cash flow to have infinite IRRs

After answering Denis' queries, answer this, "Why not?" Lacking the possibility of a GUARANTEE, you are left with some version of stochastic attempts to pin it down. No reason that has to be finite.
 
It depends on the time scale that you are considering. It is a demonstrable fact that most businesses have a continual ebb and flow of cash: imagine what is the typical pattern of cash on hand for the day before payday, payday itself, and the day after payday.

So if you want to compare investments in terms of daily cash flows, you will end up with complex IRR calculations. But one very seldom thinks along such a granular and unpredictable temporal pattern. The typical investor does not directly experience and is not affected by the vagaries of daily changes in the cash balance of the investment itself. The typical investor is interested in when his or her cash is invested and when it is returned.

A typical investment will likely call for initial expenditures of cash, perhaps for years, and then will produce net returns, perhaps for years. Think of developing an office building: soft costs and land acquisition first, then actual construction, and finally leasing commissions plus tenant improvements with no gross income at all. Then, once the building is complete, a long-lasting stream of rental income far greater than is needed for insurance, taxes, and maintenance (if the building is successful). The investor in an office building must think in terms of years, not days. A series of outflows followed by a series of inflows. One change in sign.
 
Top