Deck 7: Rate of Return Analysis

Question 1

An investment of $100,000 today, will pay 10 annual payments of $15,000 each. Compute the rate of return on this investment to the second decimal place.

A) 8.15%
B) 8.85%
C) 8.52%
D) 8.37%

Answer 1

8.15%

Question 2

Determine the ROR for a project that has an initial cost of $82,000 and would provide positive cash flows of $12,000 the first year, $14,000 the second year, $16,000 the third year, $18,000 the fourth year, $20,000 the fifth year, and $15,000 the sixth year.

A) 4.12%
B) 2.78%
C) 4.95%
D) 4.49%

Answer 2

4.49%

Question 3

Given the cash flows described in table below. Determine the ROR.
$$\begin{array} { | l | l | l | l | } \hline \text { Year } & 0 & 1 - 2 & 3 - 5 \\\hline \text { Cash flow } & - \$ 12,300 & 4,000 & 3,000 \\\hline\end{array}$$

A) 13.85%
B) 12.75%
C) 14.21%
D) 13.11%

Answer 3

12.75%

Question 4

Determine the IRR for an equipment that costs $250,000 and would provide positive cash flows of $100,000, $90,000, $80,000, and $20,000 at the end of each year for the next four years.

A) 9.75%
B) 7.53%
C) 10.90%
D) 9.38%

Question 5

Tara purchases a 20-year, 5 percent savings bond with a face value of $10,000 at a premium price of $11,000. She gets the dividend paid yearly. Determine the rate of return on the bond if the bond is kept till maturity.

A) 3.79%
B) 4.62%
C) 5.33%
D) 2.38%

Question 6

Pam promises to pay Sandy $4,000 in year 4 and another $6,000 in year 8 for a loan of $4,000 from Sandy today. What is the ROR that Sandy is getting? Assume interest is compounded monthly.

A) 14.75%
B) 16.72%
C) 15.39%
D) 18.08%

Question 7

An equipment costing $60,000 is being evaluated for a production process at Don Jones Co. The expected benefits per year is $4,500 and estimated salvage value is $20,000. Determine the rate of return the company can get in this equipment proposal. Equipment life = 20 years.

A) 4.92%
B) 5.96%
C) 5.62%
D) 4.18%

Question 8

The table below provides cash flows for two mutually exclusive alternatives for developing a "Pay for Recreation" facility being considered by a county government in Georgia. If money can be borrowed issuing bonds at the rate of 7% per year, using the RoR analysis, find the attractive alternative between the two given proposals.
$$\begin{array} { | l | l | l | } \hline \text { Year } & \text { Alt. A } & \text { Alt B } \\\hline 0 & - 1 \mathrm { OM } & - 37 \mathrm { M } \\\hline 1 - 10 & 1 \mathrm { M } & 4 \mathrm { M } \\\hline 11 - \infty & 1.5 \mathrm { M } & 2.5 \mathrm { M } \\\hline\end{array}$$

A) Alt. A
B) Alt. B

Question 9

Kruber company located Tennessee is considering two different makes of a blow molding machine for one of its automotive products. The cost data for the two alternatives are provided in table below. MARR =12%.
$$\begin{array} { | l | l | l | } \hline & \text { Machine } X & \text { Machine } Y \\\hline \text { Iritial cost } & \$ 150 K & \$ 275 K \\\hline \text { Annuul operating cost } & 55 \mathrm {~K} & 60 K \\\hline \text { Benefits /Year } & 100 K & 120 K \\\hline \text { Salvage value } & 20 K & 40 K \\\hline \text { Life } & { 10 \text { Years } } \\\hline\end{array}$$

A) Machine X
B) Machine Y

Question 10

MARR is minimum attractive rate of return.

Question 11

In a capital equipment investment project, the smallest possible rate of return is 0%.

Question 12

If Carter expects a guaranteed ROR to triple his investment in 9 years, the nominal interest rate that he got is 30%.