Final answer:
Multiple IRRs occur when a project's cash flows alternate between positive and negative. Companies like Big Drug make R&D investment decisions based on potential rates of return while considering societal benefits and financial capital demand. Imperfect information plays a role in how financial capital sources are chosen.
Step-by-step explanation:
A project will have multiple internal rates of return (IRRs) if its pattern of cash flows switches back and forth from positive to negative (non-normal cash flows). For instance, in a research and development setting such as that of the Big Drug Company, an initial investment followed by periods of both positive and negative cash flows can occur due to varying stages of development and market response.
Regarding financial capital, firms choose between sources by analyzing the rates of return and inherent risks. Imperfect information is a key factor affecting these decisions, with companies often having more knowledge about their future profit potential compared to outside investors.
Businesses have to consider the society's value through spillover benefits which could influence other firms and households. These considerations are part of why a company like Big Drug has a Dsocial curve that includes societal benefits, lying above the private Dprivate curve representing financial capital demand.