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internal rate of return (IRR) for an insurance firm

1. Which of the following statements is most correct?

a. If a projects internal rate of return (IRR) exceeds the cost of capital, then the project?s net present value (NPV) must be positive.
b. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
c. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital.
d. Statements a and c are correct.
e. None of the statements above is correct.

2. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year for 20 years. Find the internal rate of return to the nearest whole percentage point.
a. 9%
b. 7%
c. 5%
d. 3%
e. 11%

3 When evaluating potential projects, which of the following factors should be incorporated as part of a project?s estimated cash flows?
a. Any sunk costs that were incurred in the past prior to considering the proposed project.
b. Any opportunity costs that are incurred if the project is undertaken.
c. Any externalities (both positive and negative) that are incurred if the project is undertaken.
d. Statements b and c are correct.
e. All of the statements above are correct

Solution Preview

1)Which of the following statements is most correct?

a. If a projects internal rate of return (IRR) exceeds the cost of capital, then the

project?s net present value (NPV) must be positive.
b. If Project A has a higher IRR than Project B, then Project A must also have a higher
NPV.
c. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate
of return equal to the cost of capital.
d. Statements a and ...

Solution Summary

Problems associated with internal rate of return (IRR) are presented.

$2.19