Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

Which of the following is the correct calculation for Project Sigma's Internal Rate of Return (IRR)?

The rate at which Project Sigma's initial investment is divided by its total future cash inflows.

The discount rate that makes the net present value (NPV) of Project Sigma's cash flows equal to zero.

The average annual return of Project Sigma divided by its initial investment.

The interest rate used to discount Project Sigma's future cash flows to their present value at the company's cost of capital.

Previous problemNext problem

Verified step by step guidance

Step 1: Understand the concept of Internal Rate of Return (IRR). IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows from a project equal to zero. It is a measure of the profitability of an investment.

Step 2: Identify the formula for NPV. The NPV formula is: \( \text{NPV} = \sum_{t=1}^{n} \frac{C_t}{(1 + r)^t} - C_0 \), where \( C_t \) is the cash inflow at time \( t \), \( r \) is the discount rate, and \( C_0 \) is the initial investment.

Step 3: Recognize that IRR is the value of \( r \) that makes \( \text{NPV} = 0 \). This means solving the equation \( \sum_{t=1}^{n} \frac{C_t}{(1 + r)^t} - C_0 = 0 \) for \( r \).

Step 4: Note that IRR is not calculated by dividing the initial investment by total future cash inflows, nor is it the average annual return divided by the initial investment. These are incorrect definitions.

Step 5: Clarify that IRR is also not the interest rate used to discount future cash flows to their present value at the company's cost of capital. Instead, it is the rate that equates the present value of cash inflows to the initial investment, making NPV zero.