What Is A Loan From Old Midterm

Consider the following four assets. Values for present worth, annual worth, and internal rate of return have been calculated for you. The annual worth and present worth calculation assume a 10% MARR.

 A B C D Asset Life 2 3 4 6 PW (10%) -3 12 16 20 AW (10%) -2 3 8 7 IRR 7% 5% 13% 12%

1) Which of these assets is a loan?

Asset A is just a bad investment. Since MARR is greater than IRR, it doesn’t make sense for an individual to invest. Thus, the Present Worth is negative and Asset A is a bad investment.

Asset B is a loan because the Present Worth is positive even though IRR is less than MARR.

Assets C & D are investments. (PW≥0 provided that IRR≥MARR)

2) If the MARR was 10% which assets would you purchase?

Assets B, C, and D would be the best choices.

3) If the MARR was 20% which asset would you purchase?

Since MARR = 20% , choose asset B because it’s a loan.

Notice:
Annual worth is not required to answer these questions.

In order to choose which asset to purchase it’s important to use the following rule:
- If an asset is an investment PW≥0 and IRR≥MARR → BUY IT
- If an asset is a loan and IRR ≤MARR → BUY IT

page revision: 2, last edited: 05 May 2015 22:44