Question

9. Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the variances of return for FC and MC.
a. FC: 100 MC: 256
b. FC: 350 MC: 96
c. FC: 175 MC: 48
d. None of the above

Internal rate of return (IRR) method is also called:
A. Discounted payback period method
B. Discounted cash-flow (DCF) rate of return method
C. Modified internal rate of return (MIRR) method
D. None of the above

If an investment project (normal project) has IRR equal to the cost of capital, the NPV for that project is:
A. Positive
B. Negative
C. Zero
D. Unable to determine

Answer 1

9)Ans -

Variance = Summation of (X - Mean of Xs)^2 / N

Mean of Xs = Summation of Xs / N

Considering returns of FC to be Xs.

Mean Return of FC = ( -5 + 15 + 20) / 3

= 10

Variance of FC's Return = { (-5 - 10)^2 + (15 - 10)^2 + (20 - 10)^2} / 3

= 116.66

Considering returns of MC to be Ys

Mean Return of MC = ( 8 + 8 + 20) / 3

= 12

Variance of MC's Return = { (8 - 12)^2 + (8 - 12)^2 + (20 - 12)^2} / 3

= 32

So the correct option is "d", none of the above.

2nd Question - Correct option is "D" - None of the above. The other name of IRR method is Economic Rate of return method.

3rd Question - The NPV of the project will be zero. So the correct option is C. If IRR is equal to cost of capital, then the project will earn the exact amount it will have to pay, so there is no net value from the project.