Question

Consider once again the project with the cash flows described below. Determine whether this is a simple or non- simple investment AND how many possible values of i* exist using the Accumulated Cash Flow Sign Test.
A0 = -$7,500, A1 = 4,200, A2 = 3,675, A3 = -2,625, A4 = 5,250, A5 = -1,050, A6 = 1,575, A7 = 675, A8 = -3,000, A9 = 750, A10 = 750
Simple investment, at most 1 i* value
Non-simple investment, at most 1 i* value
Simple investment, at most 3 i* values
Non-simple investment, at most 3 i* values
Simple investment, at most 7 i* values

Answer 1

Answer:

The correct option is (D)

Explanation:

Using the accumulated cash flow sign test,

- This investment is a non-simple investment.

This is because the net cash flow changes sign (to positive and back to negative) more than once, during the study period.

- There are at most 3 i* values. That is values for Internal Rate of Return. This is owing to the multiple change in sign during the period.

The correct answer is option D - Non simple investment with at most 3 values for internal rate of return (i*)