Practice Quiz IRR

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School

Royal Melbourne Institute of Technology *

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Course

2269

Subject

Finance

Date

Apr 3, 2024

Type

pdf

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Uploaded by JusticeElectron4204

Internal Rate of Return (IRR): 1. What does IRR stand for in finance? a) Internal Rate of Revenue b) Internal Revenue Ratio c) Internal Rate of Return d) Interest Rate Ratio 2. What does the Internal Rate of Return (IRR) measure? a) The profitability of an investment b) The liquidity of a company c) The debt-to-equity ratio d) The market value of an asset 3. How is the Internal Rate of Return (IRR) calculated? a) By dividing the net present value (NPV) of cash flows by the initial investment b) By discounting future cash flows to their present value c) By finding the discount rate that makes the net present value (NPV) of cash flows equal to zero d) By averaging the interest rates of similar investments 4. What does a higher IRR indicate about an investment? a) Higher risk b) Lower risk c) Lower profitability d) Higher profitability 5. Which of the following is true about the interpretation of IRR? a) IRR is always expressed as a percentage b) IRR is calculated annually c) IRR is not affected by the timing of cash flows d) IRR can be negative or positive 6. What is the limitation of using IRR as a sole criterion for investment decision-making? a) IRR does not consider the timing of cash flows b) IRR cannot be compared across different investments c) IRR does not account for the risk associated with an investment d) IRR does not account for inflation 7. Which of the following cash flow patterns can result in multiple IRRs? a) A single initial investment followed by multiple cash inflows b) A series of alternating cash inflows and outflows

c) A single initial investment followed by a single cash outflow d) A series of increasing cash inflows 8. How can the issue of multiple IRRs be resolved in calculations? a) By using a different discount rate b) By selecting the IRR closest to the cost of capital c) By adjusting the timing of cash flows d) By ignoring the additional IRRs 9. Which of the following investment projects is considered more attractive based on IRR? a) Project A with an IRR of 8% b) Project B with an IRR of 10% c) Project C with an IRR of 12% d) Project D with an IRR of 6% 10. What is the significance of IRR in capital budgeting decisions? a) It helps determine the profitability of investment projects b) It determines the timing of cash flows c) It assesses the liquidity of a company d) It evaluates the debt-to-equity ratio Answers: 1. c) Internal Rate of Return 2. a) The profitability of an investment 3. c) By finding the discount rate that makes the net present value (NPV) of cash flows equal to zero 4. d) Higher profitability 5. a) IRR is always expressed as a percentage 6. a) IRR does not consider the timing of cash flows 7. b) A series of alternating cash inflows and outflows 8. b) By selecting the IRR closest to the cost of capital 9. c) Project C with an IRR of 12% 10. a) It helps determine the profitability of investment projects

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