You Are Considering an Investment with the Following Cash Flows

question 23

Multiple Choice

You are considering an investment with the following cash flows.If the required rate of return for this investment is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not?

• A)Yes; The IRR exceeds the required return.
• B)Yes; The IRR is less than the required return.
• C)No; The IRR is less than the required return.
• D)No; The IRR exceeds the required return.
• E)You cannot apply the IRR rule in this casE.Since the cash flow direction changes twice, there are two IRRs.Thus, the IRR rule cannot be used to determine acceptance or rejection.

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Definitions:

Availability Heuristic

A cognitive shortcut that depends on the first examples that spring to mind when one assesses a particular topic, concept, strategy, or choice.

Framing Effect

The influence of context or the way information is presented on how it is perceived and interpreted.

Representativeness Heuristic

A mental shortcut used for making decisions or judgments, where the likelihood of an event is estimated based on how much it resembles the typical case.

Mental Set

A predisposition to approach a problem in a particular way, influenced by past experiences and learning.