NewEnvironments:Suppose you have three divisible assets

Suppose you have three divisible assets, A, B and C with internal rates of return 2%, 5% and 10% respectively and initial costs of $1, $3, $5.

Suppose you have $9 at 1% and can borrow at 8%. Which assets do buy?

Question options:

  • A
  • B
  • C
  • Part of, but not all of, A
  • Part of, but not all of, B
  • Part of, but not all of, C

Solution:

First, order the assets in descending IRR's (largest to smallest): C (10%), B (5%), A (2%)

Next, decide if you want to buy all or part of each asset, starting with C:

  • Since you can afford the whole asset C and it's IRR (10%) > MARR (1%), buy the asset.
  • Remaining funds: $9 - $5 = $4
  • Since you can afford the whole asset B after purchasing C and B's IRR (5%) > MARR (1%), buy the asset.
  • Remaining funds $4 - $3 = $1
  • Since you can afford the whole Asset A after purchasing C and B and A's IRR (2%) > MARR (1%), buy the asset.

Answer:

  • A
  • B
  • C

Alternatively, you can also quickly infer to choose all three assets by adding up their total cost ($1 + $3 + $5 = $9) and comparing that to how much you can afford. If each asset's IRR is above the rate on retained earnings and can buy each asset without needing to borrow, buy them all.

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License