0
$\begingroup$

I have a question on how to calculate a single IRR for a group of projects that have different start dates, but have been sold on the same date. This causes the aggregate cash flows to go from negative to positive to negative. I have laid out a basic example below:

enter image description here

I have been asked to come up with a single IRR for Project 1 and Project 2. Would I simply add the cash flows to get a pooled IRR or would I weight the individual IRR's based on the original investment and sum those %'s? Alternatively, would an NPV be more appropriate instead of a single IRR?

Thanks!

$\endgroup$
0
$\begingroup$

With two changes in the sign of the cash flows, the IRR of the combined cash flows may no longer be unique (there may be two IRRs). You have to be very careful.

What I would recommend is drawing the "NPV profile graph" with the NPV on the y axis and different discount rates (0%, 5%, 10%, ..., 35%) on the x axis. The IRRs are the places where the curve crosses the horizontal axis. This will make the situation clearer.

As long as your Required Rate of Return is in a range where NPV is positive it is OK to accept the combined project.

$\endgroup$
  • $\begingroup$ Thank you. I have graphed the NPV profile of the combined cash flows from Project 1 and Project 2 provided above, and the IRR that is returned is 19.1%; despite the non-normal cash flows it looks like there will only be one IRR. That said, would it be appropriate to say the IRR for the total portfolio of projects is 19.1%, or is it better to simply say Project 1 had an IRR of 17.2% and Project 2 had an IRR of 32.9%. I should clarify that this is not a projection of future cash flows (accept / reject decision). This is a historical analysis on 2 projects. $\endgroup$ – mjmchug2 Oct 31 '19 at 18:36
  • $\begingroup$ That is good news. You can use the IRR of 19.1% since it is unique. $\endgroup$ – Alex C Oct 31 '19 at 18:48
  • $\begingroup$ Amazing. Thank you for clarifying! $\endgroup$ – mjmchug2 Oct 31 '19 at 18:51

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.