Question 1

Calculate the approximate internal rate of return given the following series of cash flows.

Accepted Answer

A) 14.47% 
B) 15.80% 
C) 19.67% 
D) 17.92% 
E) 16.83%

Question 2

The internal rate of return identifies:

Accepted Answer

A) the minimum acceptable discount rate 
B) the benefit-cost ratio 
C) the average profit from a project 
D) none of the given answers 
E) all of the given answers

Question 3

Your firm requires an average accounting return (AAR)of at least 15 per cent on all fixed Asset purchases.Currently,you are considering some new equipment costing $96 000.This equipment will have a three-year life over which time it will be depreciated on a straight line basis to a zero book value.The annual net income from this project is estimated at $5500,$12 400,and $17 600 for the three years.Should you accept this project based on the accounting rate of return? Why or why not?

Accepted Answer

A) yes;because the AAR is less than 15 per cent 
B) yes;because the AAR is equal to 15 per cent 
C) yes;because the AAR is greater than 15 per cent 
D) no;because the AAR is less than 15 per cent 
E) no;because the AAR is equal to 15 per cent

Question 4

Which one of the following defines the internal rate of return for a project?

Accepted Answer

A) a discount rate that creates a zero cash flow from assets 
B) a discount rate which results in a zero net present value for the project 
C) a discount rate which results in a net present value equal to the project's initial cost 
D) a rate of return required by the project's investors 
E) the project's current market rate of return

Question 5

The modified internal rate of return is specifically designed to address the problems associated with which one of the following?

Accepted Answer

A) mutually exclusive projects 
B) unconventional cash flows 
C) long-term projects 
D) negative net present values 
E) crossover points

Question 6

Which one of the following is an indicator that an investment is acceptable?

Accepted Answer

A) a modified internal rate of return equal to zero 
B) a profitability index of zero 
C) an internal rate of return that exceeds the required return 
D) a payback period that exceeds the required period 
E) a negative average accounting return

Question 7

Which one of the following statements is correct?

Accepted Answer

A) If the IRR exceeds the required return,the profitability index will be less than 1.0. 
B) The profitability index will be greater than 1.0 when the net present value is negative. 
C) When the internal rate of return is greater than the required return,the net present value is positive. 
D) Projects with conventional cash flows have multiple internal rates of return. 
E) If two projects are mutually exclusive,you should select the project with the shortest payback period.

Exam 8: Net Present Value and Other Investment Criteria