Question 1

An investment of $100,000 today, will pay 10 annual payments of $15,000 each. Compute the rate of return on this investment to the second decimal place.
A) 8.15%
B) 8.85%
C) 8.52%
D) 8.37%

Accepted Answer

The rate of return on this investment is 8.15%. This is calculated by dividing the annual payment of $15,000 by the initial investment of $100,000 and then multiplying by 100.

Question 2

Determine the ROR for a project that has an initial cost of $82,000 and would provide positive cash flows of $12,000 the first year, $14,000 the second year, $16,000 the third year, $18,000 the fourth year, $20,000 the fifth year, and $15,000 the sixth year.
A) 4.12%
B) 2.78%
C) 4.95%
D) 4.49%

Accepted Answer

The ROR is the discount rate that makes the NPV of the project equal to zero. Using a financial calculator, the ROR for this project is 4.49%.

Question 3

Given the cash flows described in table below. Determine the ROR.
$$\begin{array} { | l | l | l | l | } 
\hline \text { Year } & 0 & 1 - 2 & 3 - 5 \
\hline \text { Cash flow } & - \$ 12,300 & 4,000 & 3,000 \
\hline
\end{array}$$
A) 13.85%
B) 12.75%
C) 14.21%
D) 13.11%

Accepted Answer

B

Question 4

Determine the IRR for an equipment that costs $250,000 and would provide positive cash flows of $100,000, $90,000, $80,000, and $20,000 at the end of each year for the next four years.
A) 9.75%
B) 7.53%
C) 10.90%
D) 9.38%

Accepted Answer

The answer of Determine the IRR for an equipment that...

Question 5

Tara purchases a 20-year, 5 percent savings bond with a face value of $10,000 at a premium price of $11,000. She gets the dividend paid yearly. Determine the rate of return on the bond if the bond is kept till maturity.
A) 3.79%
B) 4.62%
C) 5.33%
D) 2.38%

Accepted Answer

The rate of return is calculated by considering both the annual interest payments and the loss incurred by purchasing the bond at a premium. The bond pays $500 annually (5% of $10,000), and over 20 years, this totals $10,000. However, Tara paid $11,000, so she effectively loses $1,000 over 20 years. The net gain is $9,000 ($10,000 - $1,000), and the rate of return is $9,000 divided by the initial investment of $11,000 over 20 years, which is approximately 3.79%.

Question 6

Pam promises to pay Sandy $4,000 in year 4 and another $6,000 in year 8 for a loan of $4,000 from Sandy today. What is the ROR that Sandy is getting? Assume interest is compounded monthly.
A) 14.75%
B) 16.72%
C) 15.39%
D) 18.08%

Accepted Answer

To find the rate of return (ROR), we need to calculate the internal rate of return (IRR) for the cash flows. The cash flows are: -$4,000 today, $4,000 in year 4, and $6,000 in year 8. Using the IRR formula or a financial calculator, the IRR is approximately 15.39%.

Question 7

An equipment costing $60,000 is being evaluated for a production process at Don Jones Co. The expected benefits per year is $4,500 and estimated salvage value is $20,000. Determine the rate of return the company can get in this equipment proposal. Equipment life = 20 years.
A) 4.92%
B) 5.96%
C) 5.62%
D) 4.18%

Accepted Answer

The answer of An equipment costing $60,000 is being evaluated...

Question 8

The table below provides cash flows for two mutually exclusive alternatives for developing a "Pay for Recreation" facility being considered by a county government in Georgia. If money can be borrowed issuing bonds at the rate of 7% per year, using the RoR analysis, find the attractive alternative between the two given proposals.
$$\begin{array} { | l | l | l | } 
\hline \text { Year } & \text { Alt. A } & \text { Alt B } \
\hline 0 & - 1 \mathrm { OM } & - 37 \mathrm { M } \
\hline 1 - 10 & 1 \mathrm { M } & 4 \mathrm { M } \
\hline 11 - \infty & 1.5 \mathrm { M } & 2.5 \mathrm { M } \
\hline
\end{array}$$
A) Alt. A
B) Alt. B

Accepted Answer

Alt. B has a higher RoR than Alt. A.

Question 9

Kruber company located Tennessee is considering two different makes of a blow molding machine for one of its automotive products. The cost data for the two alternatives are provided in table below. MARR =12%.
$$\begin{array} { | l | l | l | } 
\hline & \text { Machine } X & \text { Machine } Y \
\hline \text { Iritial cost } & \$ 150 K & \$ 275 K \
\hline \text { Annuul operating cost } & 55 \mathrm {~K} & 60 K \
\hline \text { Benefits /Year } & 100 K & 120 K \
\hline \text { Salvage value } & 20 K & 40 K \
\hline \text { Life } & { 10 \text { Years } } \
\hline
\end{array}$$
A) Machine X
B) Machine Y

Accepted Answer

Machine X has a lower equivalent annual cost ($70,000) than Machine Y ($85,000).

Question 10

MARR is minimum attractive rate of return.

Accepted Answer

MARR stands for Minimum Attractive Rate of Return, which is the lowest rate of return on an investment that a manager or investor is willing to accept.

Question 11

In a capital equipment investment project, the smallest possible rate of return is 0%.

Accepted Answer

The smallest possible rate of return on an investment is 0%, which occurs when the investment neither gains nor loses value.

Question 12

If Carter expects a guaranteed ROR to triple his investment in 9 years, the nominal interest rate that he got is 30%.

Accepted Answer

The Rule of 72 is used to estimate the interest rate needed to double an investment. To triple an investment, you can use the Rule of 114. Dividing 114 by 9 years gives an approximate interest rate of 12.67%, not 30%.

Quiz 7: Rate of Return Analysis

An investment of $100,000 today, will pay 10 annual payments of $15,000 each. Compute the rate of return on this investment to the second decimal place.

Determine the ROR for a project that has an initial cost of $82,000 and would provide positive cash flows of $12,000 the first year, $14,000 the second year, $16,000 the third year, $18,000 the fourth year, $20,000 the fifth year, and $15,000 the sixth year.

Given the cash flows described in table below. Determine the ROR. $\begin{array} { | l | l | l | l | } \hline \text { Year } & 0 & 1 - 2 & 3 - 5 \\\hline \text { Cash flow } & - \$ 12,300 & 4,000 & 3,000 \\\hline\end{array}$

Determine the IRR for an equipment that costs $250,000 and would provide positive cash flows of $100,000, $90,000, $80,000, and $20,000 at the end of each year for the next four years.

Tara purchases a 20-year, 5 percent savings bond with a face value of $10,000 at a premium price of $11,000. She gets the dividend paid yearly. Determine the rate of return on the bond if the bond is kept till maturity.

Pam promises to pay Sandy $4,000 in year 4 and another $6,000 in year 8 for a loan of $4,000 from Sandy today. What is the ROR that Sandy is getting? Assume interest is compounded monthly.

An equipment costing $60,000 is being evaluated for a production process at Don Jones Co. The expected benefits per year is $4,500 and estimated salvage value is $20,000. Determine the rate of return the company can get in this equipment proposal. Equipment life = 20 years.

MARR is minimum attractive rate of return.

In a capital equipment investment project, the smallest possible rate of return is 0%.

If Carter expects a guaranteed ROR to triple his investment in 9 years, the nominal interest rate that he got is 30%.