Financial Mathematics Work Sheet

Which one of the following is true about the internal rate of return (IRR) ?

• The IRR can be negative for all cash flow scenarios.
• The IRR is always higher than the cost of capital.
• The IRR is the same as the discount rate.
• The IRR is the rate at which the net present value of cash flows equals zero.

What does a positive internal rate of return (IRR) indicate about an investment?

• The investment is expected to lose money.

• The investment is expected to break even.

• The investment is expected to generate a profit.

• The investment is not worth considering.

How does the internal rate of return (IRR) relate to the net present value (NPV) of an investment?

• IRR is the rate that makes NPV positive.

• IRR is the rate that makes NPV zero.

• IRR is always less than NPV.

• IRR and NPV are unrelated.

Which of the following statements about IRR is correct?

• IRR can be used to compare projects of different sizes.

• IRR is the same as the average return on investment.

• IRR is not useful for non-conventional cash flows.

• IRR is always a conservative estimate of profitability.

A company is considering two projects, Project A and Project B. The cash flows for both projects are as follows:

• Project A: Initial investment = $10,000; Cash inflows = $4,000 for 4 years

• Project B: Initial investment = $10,000; Cash inflows = $5,000 for 3 years

What is the IRR of Project A?

• 13.56%

• 21.86%

• 10.00%

• 17.44%

A company has two projects with the following cash flows:

• Project X: Initial investment = $5,000; Cash inflows = $2,500 for 3 years

• Project Y: Initial investment = $7,000; Cash inflows = $3,000 for 3 years

If the company chooses the project with the highest IRR, which one will it select?

• Neither

• Both

• Project Y

• Project X

What happens if a project’s IRR is exactly equal to the firm’s cost of capital?

• The project will generate a positive net present value (NPV).
  

• The project will break even in terms of profitability.
  

• The project will generate a negative NPV.
  

• The project will outperform all other investment options.

Which of the following best describes a bond?

• A loan made by an investor to a borrower

• A form of equity in a company

• A financial asset that guarantees high returns
  

• A security that gives ownership of a company

A bond's face value is $10,000, and it pays a 6% coupon annually. What is the annual coupon payment?

• $300

• $600

• $1,200

• $6000,

Which of the following best explains the relationship between bond prices and interest rates?

• They are directly related: when interest rates rise, bond prices rise.
  

• They are inversely related: when interest rates rise, bond prices fall.
  

• They are independent of each other.

• Bond prices are only affected by the issuing company's stock price.