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FIN 306 NPV Midterm Exam 2026-2027 BANK QUESTIONS
WITH DETAILED VERIFIED ANSWERS EXAM QUESTIONS
WILL COME FROM HERE (100% CORRECT ANSWERS A+
GRADED
1. The Net Present Value (NPV) rule is best described as:
A) Accepting projects with a positive book rate of return
B) Accepting projects that increase shareholder wealth
C) Accepting projects with a payback period less than a cutoff
D) Accepting projects with positive accounting profits
Answer: B. The NPV rule directly measures the expected increase in
firm value from undertaking a project. A positive NPV means the
project adds value for shareholders, which is the primary goal of
financial management.
2. Which of the following is a fundamental weakness of the payback
period method?
A) It adjusts for the time value of money automatically
B) It provides a precise measure of project profitability
C) It ignores cash flows that occur after the cutoff date
D) It uses risk-adjusted discount rates
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Answer: C. Payback period only considers cash flows until the initial
investment is recovered, completely ignoring any subsequent cash
flows, which can lead to rejecting highly profitable long-term projects.
3. If the discount rate increases, what is the effect on the NPV of a
conventional project?
A) NPV increases
B) NPV decreases
C) NPV remains unchanged
D) NPV becomes negative always
Answer: B. NPV is calculated by discounting future cash flows. A higher
discount rate reduces the present value of future cash flows more
heavily, thus lowering the NPV.
4. The opportunity cost of capital is best defined as:
A) The cost of issuing new debt
B) The expected return forgone by investing in a project rather than in
financial securities with comparable risk
C) The firm's weighted average cost of capital from the balance sheet
D) The historical cost of the firm's assets
Answer: B. The opportunity cost of capital is the return investors could
earn elsewhere on investments of similar risk. It is the correct discount
rate for a project's cash flows.
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5. A project has an initial cost of $10,000 and generates a single cash
inflow of $11,500 next year. If the opportunity cost of capital is 12%,
what is the NPV?
A) $250.00
B) $267.86
C) $1,500.00
D) -$250.00
Answer: B. NPV = -10,000 + (11,.12) = -10,000 + 10,267.86 =
$267.86.
6. In capital budgeting, a conventional cash flow pattern is
characterized by:
A) Alternating positive and negative cash flows
B) An initial cash inflow followed by outflows
C) An initial cash outflow followed by a series of inflows
D) All positive cash flows
Answer: C. A conventional project starts with a negative cash flow (the
investment) and is then followed by one or more positive cash flows.
7. The Internal Rate of Return (IRR) is the discount rate that makes:
A) The profitability index equal to 1.0
B) The payback period equal to the project's life
C) The NPV of the project equal to zero
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D) The book rate of return equal to the cost of capital
Answer: C. By definition, the IRR is the discount rate at which the
present value of future cash inflows exactly equals the initial
investment, resulting in an NPV of zero.
8. According to the IRR investment rule, a project should be accepted if
the IRR is:
A) Greater than zero
B) Greater than the opportunity cost of capital
C) Less than the opportunity cost of capital
D) Equal to the payback period
Answer: B. The project's expected return (IRR) must exceed the return
required by investors for that risk level (opportunity cost of capital) to
add value.
9. A project with a non-conventional cash flow stream might have
which well-known problem with the IRR method?
A) It ignores all future cash flows
B) It can produce multiple IRRs
C) It requires an arbitrary cutoff point
D) It does not account for scale
Answer: B. When the sign of cash flows changes more than once (e.g.,
negative, positive, negative), the IRR equation can have multiple
solutions, making the decision rule ambiguous.
FIN 306 NPV Midterm Exam 2026-2027 BANK QUESTIONS
WITH DETAILED VERIFIED ANSWERS EXAM QUESTIONS
WILL COME FROM HERE (100% CORRECT ANSWERS A+
GRADED
1. The Net Present Value (NPV) rule is best described as:
A) Accepting projects with a positive book rate of return
B) Accepting projects that increase shareholder wealth
C) Accepting projects with a payback period less than a cutoff
D) Accepting projects with positive accounting profits
Answer: B. The NPV rule directly measures the expected increase in
firm value from undertaking a project. A positive NPV means the
project adds value for shareholders, which is the primary goal of
financial management.
2. Which of the following is a fundamental weakness of the payback
period method?
A) It adjusts for the time value of money automatically
B) It provides a precise measure of project profitability
C) It ignores cash flows that occur after the cutoff date
D) It uses risk-adjusted discount rates
,2|Page
Answer: C. Payback period only considers cash flows until the initial
investment is recovered, completely ignoring any subsequent cash
flows, which can lead to rejecting highly profitable long-term projects.
3. If the discount rate increases, what is the effect on the NPV of a
conventional project?
A) NPV increases
B) NPV decreases
C) NPV remains unchanged
D) NPV becomes negative always
Answer: B. NPV is calculated by discounting future cash flows. A higher
discount rate reduces the present value of future cash flows more
heavily, thus lowering the NPV.
4. The opportunity cost of capital is best defined as:
A) The cost of issuing new debt
B) The expected return forgone by investing in a project rather than in
financial securities with comparable risk
C) The firm's weighted average cost of capital from the balance sheet
D) The historical cost of the firm's assets
Answer: B. The opportunity cost of capital is the return investors could
earn elsewhere on investments of similar risk. It is the correct discount
rate for a project's cash flows.
,3|Page
5. A project has an initial cost of $10,000 and generates a single cash
inflow of $11,500 next year. If the opportunity cost of capital is 12%,
what is the NPV?
A) $250.00
B) $267.86
C) $1,500.00
D) -$250.00
Answer: B. NPV = -10,000 + (11,.12) = -10,000 + 10,267.86 =
$267.86.
6. In capital budgeting, a conventional cash flow pattern is
characterized by:
A) Alternating positive and negative cash flows
B) An initial cash inflow followed by outflows
C) An initial cash outflow followed by a series of inflows
D) All positive cash flows
Answer: C. A conventional project starts with a negative cash flow (the
investment) and is then followed by one or more positive cash flows.
7. The Internal Rate of Return (IRR) is the discount rate that makes:
A) The profitability index equal to 1.0
B) The payback period equal to the project's life
C) The NPV of the project equal to zero
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D) The book rate of return equal to the cost of capital
Answer: C. By definition, the IRR is the discount rate at which the
present value of future cash inflows exactly equals the initial
investment, resulting in an NPV of zero.
8. According to the IRR investment rule, a project should be accepted if
the IRR is:
A) Greater than zero
B) Greater than the opportunity cost of capital
C) Less than the opportunity cost of capital
D) Equal to the payback period
Answer: B. The project's expected return (IRR) must exceed the return
required by investors for that risk level (opportunity cost of capital) to
add value.
9. A project with a non-conventional cash flow stream might have
which well-known problem with the IRR method?
A) It ignores all future cash flows
B) It can produce multiple IRRs
C) It requires an arbitrary cutoff point
D) It does not account for scale
Answer: B. When the sign of cash flows changes more than once (e.g.,
negative, positive, negative), the IRR equation can have multiple
solutions, making the decision rule ambiguous.
