Question 1

You can buy a car for $40 000 paying cash now or you can finance it through a bank loan paying $700 per month for 5 years. What is the IRR of the financing option in annual terms?

Accepted Answer

The answer of You can buy a car for $40...

Question 2

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 answer of You are considering the following project: It...

Question 3

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

The answer of A two-year project has $100 million as...

Question 4

For two mutually exclusive projects with equal lives, the one with

Accepted Answer

The answer of For two mutually exclusive projects with equal...

Question 5

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

Accepted Answer

The answer of When does the problem of multiple IRRs...

Question 6

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

Accepted Answer

The answer of If you can invest money at 10%...

Question 7

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 8

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

Accepted Answer

The IRR (Internal Rate of Return) and PW (Present Worth) comparison methods generally produce the same results for both independent projects and mutually exclusive projects when the projects have equal lives. This is because both methods evaluate the financial performance of projects over their entire lifespan, and when the projects being compared have the same duration, the comparison is straightforward and yields consistent results.

Question 9

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 10

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

The answer of I sign a contract that guarantees me...

Question 11

What is the IRR corresponding to this cashflow diagram?

Accepted Answer

The answer of What is the IRR corresponding to this...

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. If I can invest money at 10% interest, what is my approximate external rate of return on the contract?

Accepted Answer

The answer of I sign a contract that guarantees me...

Question 13

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

The answer of Logistics Inc is considering buying an new...

Question 14

What is the IRR corresponding to this cashflow diagram?

Accepted Answer

The answer of What is the IRR corresponding to this...

Question 15

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

The rate of return is calculated by finding the interest rate that makes the net present value (NPV) of the cash flows equal to zero. The cash flows are: -$1,000 initially, -$100 each year for 10 years, and +$3,000 at the end of 10 years. Solving for the interest rate that balances these cash flows gives approximately 5.5%.

Question 16

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 17

If you invest $1 000 now, you will receive this amount back in two years plus dividends of $200 each year. What is the IRR of this investment?

Accepted Answer

The answer of If you invest $1 000 now, you...

Question 18

What projects are called simple investments?

Accepted Answer

Simple investments are characterized by initial outflows (investments) followed by inflows (returns), which can occur over one or more periods. This pattern reflects the typical investment process where money is spent first in anticipation of future returns.

Question 19

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

The correct answer is A because the rate of return is 9%. The 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. The net present value of the project is $2 000 + $150 * (1 - (1 + 0.09)^-10) / 0.09 + $8 000 * (1 + 0.09)^-10 - $1 000 * (1 + 0.09)^-11 = $0. Therefore, the rate of return is 9%.

Question 20

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...

Quiz 5: Comparison Methods: Part Ii

You can buy a car for $40 000 paying cash now or you can finance it through a bank loan paying $700 per month for 5 years. What is the IRR of the financing option in annual terms?

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?

For two mutually exclusive projects with equal lives, the one with

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

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

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

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

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?

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?

What is the IRR corresponding to this cashflow diagram?

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?

What is the IRR corresponding to this cashflow diagram?

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?

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.

If you invest $1 000 now, you will receive this amount back in two years plus dividends of $200 each year. What is the IRR of this investment?

What projects are called simple investments?

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?