Question 1

The internal rate of return (IRR)is

Accepted Answer

A) the interest rate that allows an investor to recoup the initial investment. 
B) the interest rate that ensures the positive cash flow of a project. 
C) the interest rate that breaks even a project's costs and benefits. 
D) the interest rate that measures the return from operating costs. 
E) the interest rate that is set up by an investor to guarantee that the return on investment will be higher than from a bank interest rate.

Question 2

YVY Consulting group received a contract to evaluate a new technological line to produce shoes. The project is subject to the following cash flows:
  If the market price of a pair of shoes is $70 and the MARR is 15%, is this a good investment on the basis of the IRR?

Accepted Answer

The answer of YVY Consulting group received a contract to...

Question 3

What is the IRR corresponding to this cashflow diagram?

Accepted Answer

A) about 9% 
B) about 12% 
C) about 19% 
D) about 22% 
E) about 25%

Question 4

Consider two mutually exclusive investments with a MARR of 60%:
The first has an initial investment of $15 000 and returns $30 000 at the end of a year.
The second costs $45 000 and returns $85 500 at the end of a year. Which is the preferred investment?

Accepted Answer

The answer of Consider two mutually exclusive investments with a...

Question 5

What are the advantages and disadvantages of the comparison method based on the IRR against the present worth comparison method?

Accepted Answer

The answer of What are the advantages and disadvantages of...

Question 6

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 the projects are mutually exclusive, which projects should be undertaken if the MARR is 15%?

Accepted Answer

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

Question 7

A project is represented by the following graphs:   What is the internal rate of return for this project?

Accepted Answer

A) 0% 
B) 4% 
C) 10% 
D) 14% 
E) 15%

Question 8

Unlike the internal rate of return method, the present and annual worth computations

Accepted Answer

A) are more complicated. 
B) do not account for the time value of money. 
C) give a direct measure of the profit provided by a project. 
D) discriminate against long-term projects. 
E) do not take into account expected service life of a project.

Question 9

What is the major advantage of the internal rate of return comparison method?

Accepted Answer

A) It gives an explicit measure of profit. 
B) It has familiar meanings to decision makers. 
C) It is very easy to calculate and therefore it is commonly used. 
D) It takes into account the need to have capital recovered quickly. 
E) It facilitates the comparison of projects of different size.

Question 10

You have two ways to invest $1 000 000 you won in a lottery: (i)to buy government bonds that earn 4% annually, or (ii)to buy an apartment building that brings you $100 000 per year in revenues. Compare the two options in terms of their internal rates of return.

Accepted Answer

The answer of You have two ways to invest $1...

Question 11

A project is subject to the following cash flow diagram:  What is its rate of return?

Accepted Answer

A) 22% 
B) 36% 
C) 56% 
D) 60% 
E) 74%

Question 12

I sign a contract that guarantees me an immediate payment of $2 000, but then I have to invest $800 a year for ten years. At the end of the tenth year I get a further payment of $8 000. What is my internal rate of return on the contract?

Accepted Answer

A) There are two solutions: 8% and 16%. 
B) There are two solutions: 13% and 25%. 
C) There are two solutions, 15% and 30%. 
D) There are two solutions: 18% and 24%. 
E) There is a single solution: about 22%.

Question 13

A project involves an immediate expenditure of $2 000, and will require additional expenditures of $150 a year for the next ten years, starting one year from now. After ten years it yields an income of $8 000, but a year later a further expenditure of $1 000 will be required to close down the project. What is its rate of return?

Accepted Answer

A) 9% 
B) 10% 
C) 11% 
D) 12% 
E) 13%

Question 14

Suppose that a project pays $5 000 on odd years and costs $5 000 on even years. If the life of the project is 6 years, what is its approximate external rate of return if the MARR is 10%? Would you accept or reject such a project?

Accepted Answer

The answer of Suppose that a project pays $5 000...

Question 15

What is the difference between the internal rate of return and the minimum acceptable rate of return?

Accepted Answer

The answer of What is the difference between the internal...

Question 16

Suppose that Maria borrowed $5 000 from a bank to be repaid in five equal annual payments of $1 250. What is the IRR of this transaction?

Accepted Answer

The answer of Suppose that Maria borrowed $5 000 from...

Question 17

The internal rate of return (IRR)is negative if

Accepted Answer

A) a project is losing money. 
B) a cash inflow exceeds a cash outflow. 
C) a project just breaks even. 
D) a project is a simple investment. 
E) IRR cannot be negative.

Question 18

What projects are called simple investments?

Accepted Answer

A) projects that consist of one inflow at the start followed by only one outflow 
B) projects that have only two internal rates of return 
C) projects that have a stream of revenues at the start followed by a stream of investments 
D) projects that have one or more periods of outflows at the start followed by one or more periods of inflows 
E) projects that require calculation of the external rate of return

Question 19

I sign a contract that guarantees me an immediate payment of $2 000, but then I have to invest $800 a year for ten years. At the end of the tenth year I get a further payment of $8 000. If I can invest money at 10% interest, what is my approximate external rate of return on the contract?

Accepted Answer

A) about 9% 
B) about 10% 
C) about 11% 
D) about 12% 
E) There are two solutions, about 8% and about 12%.

Question 20

Assume that Stan takes a student loan of $5 000 at the beginning of his first year at Miskatonic University and graduates at the end of year 5. After graduation, a 7% interest rate on the debt is applied. If Stan makes four equal annual payments to re-pay the debt in four years after graduation, what is the IRR on his loan?

Accepted Answer

The answer of Assume that Stan takes a student loan...

Exam 5: Comparison Methods: Part Ii

The internal rate of return (IRR) is

YVY Consulting group received a contract to evaluate a new technological line to produce shoes. The project is subject to the following cash flows: If the market price of a pair of shoes is $70 and the MARR is 15%, is this a good investment on the basis of the IRR?

What is the IRR corresponding to this cashflow diagram?

Consider two mutually exclusive investments with a MARR of 60%: The first has an initial investment of $15 000 and returns $30 000 at the end of a year. The second costs $45 000 and returns $85 500 at the end of a year. Which is the preferred investment?