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.

page revision: 4, last edited: 22 Dec 2015 21:00