11) What assumption makes the external rate of return a proxy?
A) All receipts of a project are assumed to be invested at the minimum acceptable rate of return
B) Receipts that occur when a project balance is positive are assumed to be invested at the minimum acceptable rate of return
C) All receipts and disbursements of a project are assumed to be invested at the minimum acceptable rate of return
D) Receipts and disbursements that occur when a project balance is positive are assumed to be invested at the minimum acceptable rate of return
E) A project’s balance should be positive all the time
12) The external rate of return must be used if
A) there are multiple internal rates of return
B) a project involves only simple investments.
C) a project starts with cash outflow
D) a project requires multiple investments and generates multiple benefits
E) it is impossible to calculate the minimum acceptable rate of return.
13) A project is subject to the following cash flow diagram:
What rate of return would it be appropriate to use in this case?
A) ERR
B) IRR
C) MARR
D) Market rate of return
E) Explicit rate of return
14) What is the major advantage of the internal rate of return comparison method?
A) It gives an explicit measure of profit.
B) It has familiar meanings to decision makers.
C) It is very easy to calculate and therefore it is commonly used.
D) It takes into account the need to have capital recovered quickly.
E) It facilitates the comparison of projects of different size.
15) Which of the following statements is true with regard to the ERR?
A) The approximate ERR is just a proxy for the IRR.
B) The precise ERR is a proxy for the IRR.
C) For a simple investment, the precise ERR is greater than the IRR.
D) For a simple investment, the approximate ERR is greater than the IRR.
E) An acceptable project will earn at least the approximate ERR.
16) What is the major disadvantage of the internal rate of return method?
A) It complicates the comparison of projects of the different sizes.
B) It can produce more than one internal rate of return.
C) It discriminates against long-term projects.
D) It ignores the time value of money.
E) It ignores the expected service life.
17) A project is subject to the following cash flow diagram:
What is its rate of return?
A) 22%
B) 36%
C) 56%
D) 60%
E) 74%
18) Unlike the internal rate of return method, the present and annual worth computations
A) are more complicated.
B) do not account for the time value of money.
C) give a direct measure of the profit provided by a project.
D) discriminate against long-term projects.
E) do not take into account expected service life of a project.
19) The following table summarizes information for five projects:
The data can be interpreted in the following way: The IRR on the incremental investment between project 5 and project 4 is 16%.
If all projects are independent and the company has at least $1 025 000 to invest, which projects should be undertaken if the MARR is 16%?
A) only 2
B) 2 and 4
C) 1, 3 and 5
D) 1, 3, 4 and 5
E) 1, 2, 3, 4 and 5
20) The following table summarizes information for five projects:
The data can be interpreted in the following way: The IRR on the incremental investment between project 5 and project 4 is 16%.
If the projects are mutually exclusive, which projects should be undertaken if the MARR is 15%?
A) 3 only
B) 5 only
C) 3 and 5
D) 3, 4 and 5
E) 1, 3, 4, and 5
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