Question 1

What is the major disadvantage of the internal rate of return method?

Accepted Answer

A) It complicates the comparison of projects of the different sizes. 
B) It can produce more than one internal rate of return. 
C) It discriminates against long-term projects. 
D) It ignores the time value of money. 
E) It ignores the expected service life. 
A) It complicates the comparison of projects of the different sizes. 
B) It can produce more than one internal rate of return. 
C) It discriminates against long-term projects. 
D) It ignores the time value of money. 
E) It ignores the expected service life. B

Question 2

A project is subject to the following cash flow diagram:   What rate of return would it be appropriate to use in this case?

Accepted Answer

A) ERR 
B) IRR 
C) MARR 
D) Market rate of return 
E) Explicit rate of return 
A) ERR 
B) IRR 
C) MARR 
D) Market rate of return 
E) Explicit rate of return B

Question 3

A project involves an immediate expenditure of $1 000, and will require additional expenditures of $100 a year for the next ten years, starting one year from now. After ten years it yields an income of $3 000. What is its rate of return?

Accepted Answer

A) 3.5% 
B) 4.5% 
C) 5.5% 
D) 6.5% 
E) 7.5% 
A) 3.5% 
B) 4.5% 
C) 5.5% 
D) 6.5% 
E) 7.5% C

Question 4

A project requires no initial investment. It costs $4 000 a year from now and earns $8 000 two years from now. What is its internal rate of return?

Accepted Answer

A) 24% 
B) 50% 
C) 75% 
D) 100% 
E) 141% 
A) 24% 
B) 50% 
C) 75% 
D) 100% 
E) 141%

Question 5

You are considering the following project: It pays you $5 000 at the end of the first year, costs $10 000 by the end of the second year and brings $4 000 next year. What is the project's internal rate of rate, external rate of return and the approximate external rate of return if current market interest rate is 25%? Comment on the project acceptability on the basis of the given information.

Accepted Answer

The IRR is calculated from PW(Costs)= PW

Question 6

Dealing with mutually exclusive projects, we start with some current alternative. How do we chose it?

Accepted Answer

A) the alternative with the highest internal rate of return 
B) the alternative with a zero net benefit 
C) the alternative with the benefit-cost ratio of one 
D) the "do nothing" alternative 
E) the alternative with the smallest first cost 
A) the alternative with the highest internal rate of return 
B) the alternative with a zero net benefit 
C) the alternative with the benefit-cost ratio of one 
D) the "do nothing" alternative 
E) the alternative with the smallest first cost

Question 7

The fundamental idea behind comparison of mutually exclusive projects on the basis of incremental IRR is

Accepted Answer

A) different fractions of investments are associated with different levels of productivity. 
B) all investments are non-simple. 
C) some investments are not productive. 
D) multiple IRRs. 
E) high uncertainty. 
A) different fractions of investments are associated with different levels of productivity. 
B) all investments are non-simple. 
C) some investments are not productive. 
D) multiple IRRs. 
E) high uncertainty.

Question 8

If you can invest money at 10% interest, what is the approximate ERR corresponding to this cashflow diagram?

Accepted Answer

A) 15% 
B) 20% 
C) 25% 
D) 30% 
E) 35% 
A) 15% 
B) 20% 
C) 25% 
D) 30% 
E) 35%

Question 9

When does the problem of multiple IRRs arise and what are possible solutions to the problem?

Accepted Answer

If a project is not a simple investment,

Question 10

A two-year project has $100 million as initial investment and generates net savings of $60 million per year. What is the project's IRR?

Accepted Answer

A) 10.1% 
B) 11.1% 
C) 12.1% 
D) 13.1% 
E) 14.1% 
A) 10.1% 
B) 11.1% 
C) 12.1% 
D) 13.1% 
E) 14.1%

Question 11

The following table summarizes information for five projects:   The data can be interpreted in the following way: The IRR on the incremental investment between project 5 and project 4 is 16%. If all projects are independent and the company has at least $1 000 000 to invest, which projects should be undertaken if the MARR is 16%?

Accepted Answer

A) only 2 
B) 2 and 4 
C) 1, 3, and 5 
D) 1, 3, 4, and 5 
E) 1, 2, 3, 4, and 5 
A) only 2 
B) 2 and 4 
C) 1, 3, and 5 
D) 1, 3, 4, and 5 
E) 1, 2, 3, 4, and 5

Question 12

Suppose that you can buy a car now for $20 000. On the other hand, you can lease it at $350 per month for 60 months. If you buy a car now, then you will be able to sell it at the end of the fifth year for $8 000. If you choose to lease, what is the monthly and annual IRR of the lease compared to the buying a car now?

Accepted Answer

If you choose to lease, you forgo $20 00

Question 13

The external rate of return must be used if

Accepted Answer

A) there are multiple internal rates of return. 
B) a project involves only simple investments. 
C) a project starts with cash outflow. 
D) a project requires multiple investments and generates multiple benefits. 
E) it is impossible to calculate the minimum acceptable rate of return. 
A) there are multiple internal rates of return. 
B) a project involves only simple investments. 
C) a project starts with cash outflow. 
D) a project requires multiple investments and generates multiple benefits. 
E) it is impossible to calculate the minimum acceptable rate of return.

Question 14

Which of the following statements is TRUE with regard to the ERR?

Accepted Answer

A) The approximate ERR is just a proxy for the IRR. 
B) The precise ERR is a proxy for the IRR. 
C) For a simple investment, the precise ERR is greater than the IRR. 
D) For a simple investment, the approximate ERR is greater than the IRR. 
E) The approximate ERR can be used to evaluate a project, whether a simple investment or not. 
A) The approximate ERR is just a proxy for the IRR. 
B) The precise ERR is a proxy for the IRR. 
C) For a simple investment, the precise ERR is greater than the IRR. 
D) For a simple investment, the approximate ERR is greater than the IRR. 
E) The approximate ERR can be used to evaluate a project, whether a simple investment or not.

Question 15

In general, the IRR comparison method and the PW comparison method

Accepted Answer

A) produce the same results for independent projects but not for mutually exclusive projects. 
B) produce the same results for mutually exclusive projects but not for independent projects. 
C) produce different results for both independent projects and mutually exclusive projects. 
D) produce the same results for independent projects and mutually exclusive projects with unequal lives. 
E) produce the same results for independent projects and mutually exclusive projects with equal lives. 
A) produce the same results for independent projects but not for mutually exclusive projects. 
B) produce the same results for mutually exclusive projects but not for independent projects. 
C) produce different results for both independent projects and mutually exclusive projects. 
D) produce the same results for independent projects and mutually exclusive projects with unequal lives. 
E) produce the same results for independent projects and mutually exclusive projects with equal lives.

Question 16

Two mutually exclusive alternatives are being compared. We should choose the alternative that

Accepted Answer

A) has a higher minimum acceptable rate of return assuming the lives of the alternatives are equal. 
B) has a higher internal rate of return assuming the lives of the alternatives are equal. 
C) has a higher internal rate of return regardless of the lives of the alternatives. 
D) has an incremental investment with a rate of return equal to the minimum acceptable rate of return. 
E) has an incremental investment with the rate of return exceeding minimum acceptable rate of return. 
A) has a higher minimum acceptable rate of return assuming the lives of the alternatives are equal. 
B) has a higher internal rate of return assuming the lives of the alternatives are equal. 
C) has a higher internal rate of return regardless of the lives of the alternatives. 
D) has an incremental investment with a rate of return equal to the minimum acceptable rate of return. 
E) has an incremental investment with the rate of return exceeding minimum acceptable rate of return.

Question 17

What economic concept is used as background for the external rate of return?

Accepted Answer

A) a present worth 
B) a net cash flow 
C) an internal rate of return 
D) a payback period 
E) an opportunity cost 
A) a present worth 
B) a net cash flow 
C) an internal rate of return 
D) a payback period 
E) an opportunity cost

Question 18

A flight school operates 5 different types of airplanes. All airplanes are outdated and require some modifications. The school has $33 000 available in the budget for airplane modification this year. An aviation engineer came up with this plan to update all airplanes. The plan's costs are shown in the following table:   Which airplane modification does the school have to postpone till next year?

Accepted Answer

A) 1 
B) 2 
C) 3 
D) 4 
E) 5 
A) 1 
B) 2 
C) 3 
D) 4 
E) 5

Question 19

Logistics Inc is considering buying an new cube van for $150 000 which will have a scrap value of $10 000 after its 8 year life. The total savings due to the new van compared with continuing without will be $12 000 the first year increasing by $6 000 each year thereafter. The total extra costs due to the van is estimated to be $5 000 per year. Logistics Inc has a MARR of 10%. Using the IRR for Independent Projects method determine if the van should be purchased.

Accepted Answer

Because most of the cash flows are annua

Question 20

What is the difference between the internal rate of return (IRR)and the external rate of return (ERR)?

Accepted Answer

A) The IRR is earned by a project whereas the ERR is earned outside of it. 
B) The ERR equals the difference between the IRR and the MARR. 
C) The IRR usually equals the MARR whereas the ERR is always higher than the MARR. 
D) The ERR is earned when a project's return is used for the purpose of further reinvestment while the IRR is typically used for calculating the net return of a project. 
E) For a given explicit rate of return, a project can have more than one value for its ERR but can have only one value for its IRR. 
A) The IRR is earned by a project whereas the ERR is earned outside of it. 
B) The ERR equals the difference between the IRR and the MARR. 
C) The IRR usually equals the MARR whereas the ERR is always higher than the MARR. 
D) The ERR is earned when a project's return is used for the purpose of further reinvestment while the IRR is typically used for calculating the net return of a project. 
E) For a given explicit rate of return, a project can have more than one value for its ERR but can have only one value for its IRR.

What is the major disadvantage of the internal rate of return method?

A project is subject to the following cash flow diagram: What rate of return would it be appropriate to use in this case?

A project involves an immediate expenditure of $1 000, and will require additional expenditures of $100 a year for the next ten years, starting one year from now. After ten years it yields an income of $3 000. What is its rate of return?

A project requires no initial investment. It costs $4 000 a year from now and earns $8 000 two years from now. What is its internal rate of return?

Dealing with mutually exclusive projects, we start with some current alternative. How do we chose it?

The fundamental idea behind comparison of mutually exclusive projects on the basis of incremental IRR is

If you can invest money at 10% interest, what is the approximate ERR corresponding to this cashflow diagram?

When does the problem of multiple IRRs arise and what are possible solutions to the problem?

A two-year project has $100 million as initial investment and generates net savings of $60 million per year. What is the project's IRR?

The external rate of return must be used if

Which of the following statements is TRUE with regard to the ERR?

In general, the IRR comparison method and the PW comparison method

Two mutually exclusive alternatives are being compared. We should choose the alternative that

What economic concept is used as background for the external rate of return?

What is the difference between the internal rate of return (IRR)and the external rate of return (ERR)?

Engineering Decision Making

Time Value of Money

Cash Flow Analysis

Comparison Methods: Part I

Financial Accounting and Business Plans

Replacement Decisions

Taxes

Inflation

Public Sector Decision Making

Project Management

Dealing With Uncertainty and Risk

Filters

Exam 5: Comparison Methods: Part Ii

What is the major disadvantage of the internal rate of return method?

A project is subject to the following cash flow diagram: What rate of return would it be appropriate to use in this case?

A project involves an immediate expenditure of $1 000, and will require additional expenditures of $100 a year for the next ten years, starting one year from now. After ten years it yields an income of $3 000. What is its rate of return?

A project requires no initial investment. It costs $4 000 a year from now and earns $8 000 two years from now. What is its internal rate of return?

Dealing with mutually exclusive projects, we start with some current alternative. How do we chose it?

The fundamental idea behind comparison of mutually exclusive projects on the basis of incremental IRR is

If you can invest money at 10% interest, what is the approximate ERR corresponding to this cashflow diagram?

When does the problem of multiple IRRs arise and what are possible solutions to the problem?

A two-year project has $100 million as initial investment and generates net savings of $60 million per year. What is the project's IRR?

The external rate of return must be used if

Which of the following statements is TRUE with regard to the ERR?

In general, the IRR comparison method and the PW comparison method

Two mutually exclusive alternatives are being compared. We should choose the alternative that

What economic concept is used as background for the external rate of return?

What is the difference between the internal rate of return (IRR)and the external rate of return (ERR)?

Engineering Decision Making

Time Value of Money

Cash Flow Analysis

Comparison Methods: Part I

Financial Accounting and Business Plans

Replacement Decisions

Taxes

Inflation

Public Sector Decision Making

Project Management

Dealing With Uncertainty and Risk

Filters