MGMT 2035 FINAL COMPLETE EXAM QUESTIONS AND CORRECT
ANSWERS (2026-2027 )
How do we account for both the inflows and outflows that make up an
investment?
Net Present Value
How do you define Net Present Value?
The present value of all inflows minus the present value of all outflows in a
stream of cash flows.
What is the NPV formula?
Net Present Value = PV of Inflows - PV of Outflows
Steps for calculating NPV
1. Calculate the Present Value of the investment's Cash Inflow
2. Calculate the Present Value of the investment's Cash Outflow
3. Subtract the PV of the Outflows from the PV of the inflows
What is the Present Value Formula?
PV = FV/(1+i)^n
PV = Present Value
FV = Future Value
i = Discount Rate (the rate of return on the alternative investment)
N = Time ("periods") between now and future payments
How much would you be willing to give up today (PV) in order to receive one
specific cash flow (FV) in exactly N years from today?
How to manually calculate Present Value in Excel
Excel Formula Example=50/(1+5%)^2
PV of Outflows
Excel Formula Example=-50/(1+5%)^2
, The NPV Rule for Making Investment Decisions
Only invest in projects with NPV greater than or equal to zero.
Invest only if NPV ≥ 0
Invest only if PV of Inflows - PV of Outflows ≥ 0
Invest only if PV of Inflows ≥ PV of Outflows
Intuition of NPV Rule
Only invest in something if the Present Value of what you get (the inflows) is
great than or equal to the Present Value of what you paid (the outflows).
Mutually exclusive projects / NPV
If you must choose between mutually exclusive projects, invest in the project
with the higher NPV.
Internal Rate of Return
Textbook definition:
The Discount Rate such that the Net Present Value of an investment is zero.
Intuitive definition:
The equivalent annualized rate of return you're earning on your money while it's
invested in the project.
Excel IRR function
=IRR(C4:H4)
IRR Rules for Making Decisions about Projects
1. Only undertake a project when IRR is greater than or equal to the Discount
Rate.
2. When considering two mutually exclusive projects, choose the project with
the higher NPV rather than a higher IRR.
This is because you're focusing on growing overall wealth, not the rate of return
gained on some of your dollars. IRR does not tell you how much you are
investing, which is a critical omission of information on the magnitude of the
investment. The twin pillars of investing are IRR and NPV, essential for a full
picture of the investment attributes.
Present Value Formula
ANSWERS (2026-2027 )
How do we account for both the inflows and outflows that make up an
investment?
Net Present Value
How do you define Net Present Value?
The present value of all inflows minus the present value of all outflows in a
stream of cash flows.
What is the NPV formula?
Net Present Value = PV of Inflows - PV of Outflows
Steps for calculating NPV
1. Calculate the Present Value of the investment's Cash Inflow
2. Calculate the Present Value of the investment's Cash Outflow
3. Subtract the PV of the Outflows from the PV of the inflows
What is the Present Value Formula?
PV = FV/(1+i)^n
PV = Present Value
FV = Future Value
i = Discount Rate (the rate of return on the alternative investment)
N = Time ("periods") between now and future payments
How much would you be willing to give up today (PV) in order to receive one
specific cash flow (FV) in exactly N years from today?
How to manually calculate Present Value in Excel
Excel Formula Example=50/(1+5%)^2
PV of Outflows
Excel Formula Example=-50/(1+5%)^2
, The NPV Rule for Making Investment Decisions
Only invest in projects with NPV greater than or equal to zero.
Invest only if NPV ≥ 0
Invest only if PV of Inflows - PV of Outflows ≥ 0
Invest only if PV of Inflows ≥ PV of Outflows
Intuition of NPV Rule
Only invest in something if the Present Value of what you get (the inflows) is
great than or equal to the Present Value of what you paid (the outflows).
Mutually exclusive projects / NPV
If you must choose between mutually exclusive projects, invest in the project
with the higher NPV.
Internal Rate of Return
Textbook definition:
The Discount Rate such that the Net Present Value of an investment is zero.
Intuitive definition:
The equivalent annualized rate of return you're earning on your money while it's
invested in the project.
Excel IRR function
=IRR(C4:H4)
IRR Rules for Making Decisions about Projects
1. Only undertake a project when IRR is greater than or equal to the Discount
Rate.
2. When considering two mutually exclusive projects, choose the project with
the higher NPV rather than a higher IRR.
This is because you're focusing on growing overall wealth, not the rate of return
gained on some of your dollars. IRR does not tell you how much you are
investing, which is a critical omission of information on the magnitude of the
investment. The twin pillars of investing are IRR and NPV, essential for a full
picture of the investment attributes.
Present Value Formula
