If an investment of $19000 results in on annual rate of return of $2,000 for the
ID: 1221987 • Letter: I
Question
If an investment of $19000 results in on annual rate of return of $2,000 for the following five yours, the internal rate of return on this investment is negative For a given future cash flow the larger the interest rate the smaller its equivalent present value. The annual return an investment is defined by the ration between the annual gross income to the total amount of investment. For a very small interest rate, and project duration of two years, the amity is slightly less than half of the pasture worth of the project.Explanation / Answer
1) The correct choice is false
Explanation : - For an annual rate of return of $ 2,000 , the internal rate of return is 0% and not negative .
2) The correct choice is True
Present value = Future cash flow / ( 1+ Interest rate) n
where n = no of years .
Present value and interest rate are inversely related to each other , the higher the interest rate , lower the present value and vice versa
3) The correct choice is true
Explanation : Rate of return = Gross income / Total investment
4) The correct choice is true .
Explanation : Suppose the future worth of the project is $ 5000
and interest rate = 5%
FVA = A [ ( 1+r)n -1] / r
A = FVA X r / [ ( ( 1+r)n -1 ]
A = $ 5000 X 0.05 / [ ( 1+0.05) 2 -1 ]
A = $ 2,439.02