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Click on each question to check your answer.
1. Why is rate of return the most frequently used measure in industry?
It is the most frequently used measure as it measures the desirability of the project in terms that are widely and easily understood. (p. 202)
2. According to the rate of return analysis, should a project with a positive internal rate of return be accepted? Explain briefly.
No. According to the rate of return analysis, the project’s IRR should be higher than MARR to be accepted. (pp. 202-203)
3. How do you calculate the rate of return on an investment?
Convert the different consequences of the investment into a cash flow series. Then solve the cash flow series for the unknown value of IRR. (p. 204)
4. What is the major hidden problem in the rate of return analysis?
It focuses on the rate of return at the expense of maximizing the net wealth. (p. 212)
5. What is the second pitfall in the rate of return analysis?
The solution for the unknown value of IRR is not unique: multiple IRRs may exist. (p. 221)