midterm 2 questions 2 - 4

Form A:

Year A B C
0 10 10 10
1 -15 0 0
2 0 -15 0
3 0 0 -15

2. What is the internal rate of return of asset C?

This is a loan problem. You can tell because the benefits
are given (it is positive) in year 0. Afterwards the loan
must be repaid.

To find IRR: PW= 0 = 10 -15/(1 + i)^3
rearranging: 10 = 15/(1 + i)^3
(1 + i)^3 = 15/10
i = (15/10)^(1/3) - 1
i = 14.47%

3. Which asset has the highest internal rate of return?

The correct answer is A: IRR = 50%. You set up the problem like 2 only
the (1 + i) term is raised to the power of 1 and not 3.

4. In an unconstrained choice environment which assets would you purchase
if your minimum acceptable rate of return was 20%?

The correct answer is C: IRR < MARR

The criteria is reversed because the assets are all loans.

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