Finance Final Exam Review – Complete Study Guide & Practice Test
(2026)
NPV Independent Projects Decision Rule: - ANS ✔✔All projects with a positive NPV are
acceptable.
NPV Mutually Exclusive Projects Decision Rule: - ANS ✔✔Accept the project with the highest
NPV.
Capital Budgeting Project Types: - ANS ✔✔1) Equipment replacement
2) Expansion of existing product lines
3) New products
4) Regulatory projects (safety/environmental)
Define: mutually exclusive project - ANS ✔✔If one project is accepted, others must be rejected.
Define: independent project - ANS ✔✔Acceptance of one project does not depend upon the
decision made on other projects.
If the project is of typical risk for the firm, _______ is used to evaluate the after-tax project cash
flows. - ANS ✔✔WACC
If the project risk is above/below the risk of an average firm project, WACC may be adjusted to
account for the ____________ _______. - ANS ✔✔differential risk
Strengths of the payback method: - ANS ✔✔1) Easy to compute and understand
2) Gives an indication of project liquidity
, Weaknesses of the payback method: - ANS ✔✔1) Does not give a clear decision
2) Ignores TVM
3) Ignores all cash flows that occur after the payback period
Strengths of NPV method: - ANS ✔✔1) Gives a definite decision on the profitability of projects
2) Decision is based on the wealth created by the project
3) Reflects entire cash flow stream
4) Considers TVM
Define: Internal Rate of Return (IRR) - ANS ✔✔The discount rate at which the present value of
the project's cash inflows equals the present value of its cash outflows.
Internal Rate of Return Decision Rule: - ANS ✔✔a project is profitable when the IRR is greater
than the cost of financing.
Weaknesses of IRR: - ANS ✔✔1) A cash flow stream can have more than one IRR
2) IRR correlates imperfectly with wealth creation
Define: Modified Internal Rate of Return (MIRR) - ANS ✔✔Whereas IRR assume all cash flows
are reinvested at IRR, MIRR assumes all cash flows are reinvested at the cost of capital.
Define: Crossover Rate - ANS ✔✔At the crossover rate, the NPVs of two projects are equal.
If two projects have unequal lives, use the ________________ _________ __________,
repeating projects until the lives of the projects are equal. - ANS ✔✔replacement chain method
Alternatively, if two projects have unequal lives, use the ____________ ________ ___________
________, converting project cash flows into a constant cash flow stream using a ______
(2026)
NPV Independent Projects Decision Rule: - ANS ✔✔All projects with a positive NPV are
acceptable.
NPV Mutually Exclusive Projects Decision Rule: - ANS ✔✔Accept the project with the highest
NPV.
Capital Budgeting Project Types: - ANS ✔✔1) Equipment replacement
2) Expansion of existing product lines
3) New products
4) Regulatory projects (safety/environmental)
Define: mutually exclusive project - ANS ✔✔If one project is accepted, others must be rejected.
Define: independent project - ANS ✔✔Acceptance of one project does not depend upon the
decision made on other projects.
If the project is of typical risk for the firm, _______ is used to evaluate the after-tax project cash
flows. - ANS ✔✔WACC
If the project risk is above/below the risk of an average firm project, WACC may be adjusted to
account for the ____________ _______. - ANS ✔✔differential risk
Strengths of the payback method: - ANS ✔✔1) Easy to compute and understand
2) Gives an indication of project liquidity
, Weaknesses of the payback method: - ANS ✔✔1) Does not give a clear decision
2) Ignores TVM
3) Ignores all cash flows that occur after the payback period
Strengths of NPV method: - ANS ✔✔1) Gives a definite decision on the profitability of projects
2) Decision is based on the wealth created by the project
3) Reflects entire cash flow stream
4) Considers TVM
Define: Internal Rate of Return (IRR) - ANS ✔✔The discount rate at which the present value of
the project's cash inflows equals the present value of its cash outflows.
Internal Rate of Return Decision Rule: - ANS ✔✔a project is profitable when the IRR is greater
than the cost of financing.
Weaknesses of IRR: - ANS ✔✔1) A cash flow stream can have more than one IRR
2) IRR correlates imperfectly with wealth creation
Define: Modified Internal Rate of Return (MIRR) - ANS ✔✔Whereas IRR assume all cash flows
are reinvested at IRR, MIRR assumes all cash flows are reinvested at the cost of capital.
Define: Crossover Rate - ANS ✔✔At the crossover rate, the NPVs of two projects are equal.
If two projects have unequal lives, use the ________________ _________ __________,
repeating projects until the lives of the projects are equal. - ANS ✔✔replacement chain method
Alternatively, if two projects have unequal lives, use the ____________ ________ ___________
________, converting project cash flows into a constant cash flow stream using a ______
