Question

Table on the right shows the net cashflow and cumulative cashflow for two projects A and B. Answer the following questions. 1- Based on Descarte's rule of signs, what is the max. number of real ROR (1") for project A? Project A Project B 2. Looking at cumulative CF of project A, can we tell that it has only one positive i' value? (put yes or no) NCF Cumulative CF NCE Cumulative CF 2,000 -180 -180 2.000 -500 1,500 -130 3. Based on Descarte's rule of signs, what is the max. number of real ROR (i") for project B? -8.100 -6,600 6 100 299 100 300 4- Looking at cumulative CF of project B, can we tell that it has only one positive i' value? (put yes or no)

Answer 1

Ans:

1. Based on Descarte's rule of signs : Max number of real ROR can we found as maximum times the positive or negative signs changes.

Based on above:

Maximum number of sign chages in cash flow:

Year 0: +

Year 1: -

Year 2: -

Year 3: +

Year 4 : +

Change in sign from year-0 = 2 times

The maximum number of real ROR's (i) for project A is 2.

2.

In case of project A, i* for commulative CF is more than 1 as there are non cosistent cash flows, so correct answer is No.

3.

1. Based on Descarte's rule of signs : Max number of real ROR can we found as maximum times the positive or negative signs changes.

Based on above:

Maximum number of sign chages in cash flow:

Year 0: -

Year 1: +

Year 2: +

Year 3: +

Year 4 : +

Change in sign from year-0 = 1 time

The maximum number of real ROR's (i) for project B is 1.

4.

In case of project B, i* for commulative CF is 1 as there is consistent cash flow each year, so correct answer is Yes.