Discussion
The external or modified rate of return resolves multiple roots by
Answer: B
Correct answer: reinvesting intermediate flows at an assumed external rate
The multiple-root problem arises because the internal rate implicitly assumes intermediate receipts are reinvested at itself, which may be absurd. The modified rate states the reinvestment rate explicitly, compounds the positive flows forward at it to a single future sum, and solves for the one rate that equates that sum to the present outlays. A single sign change remains, so a single root.
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