FNAN 522 Module 4 Review – Complete Finance Study Guide &
Practice Questions (2026)
A company is analyzing a variety of potential investments using different capital budgeting
methods. Which of the following represents the most profitable choice based on the
information provided?
a. The company picks a project with an accounting rate of return 5% over one with an ARR of
3%.
b. The company picks a project with an NPV of $250,000 over one with an NPV of $300,000.
c. The company picks a project with profitability index of 1.25 over a project with a PI of -.25.
d. The company picks a project with a 5 year payback period over one with a 3 year payback
period. - correct answer ✔✔c. The company picks a project with profitability index of 1.25 over
a project with a PI of -.25.
A firm is trying to choose the most profitable project to invest in. Which of the following should
be used as the company's discount rate?
a. The company's reinvestment rate or weighted average cost of capital.
b. The company's weighted average cost of capital.
c. The company's profitability index.
d. The projects' average internal rate of return. - correct answer ✔✔a. The company's
reinvestment rate or weighted average cost of capital.
Calculate the discounted payback period for a project with a discount rate of 5% the following
cash flows:Year 0: -$2000Year 1: $1000Year 2: -$1000Year 3: $1000Year 4: $3000Year 5: $2000 -
correct answer ✔✔3.44 years.
In which of the following situations would it be appropriate to use the IRR method to make an
investment decision?
a. To compare two investments that have different durations.
, b. To assess a project which cash flows fluctuate between positive and negative.
c. All of these answers.
d. To compare two projects that have an equal initial investment and lifespan - correct answer
✔✔d. To compare two projects that have an equal initial investment and lifespan.
The tax rate that applies to the last dollar of the tax base and is often applied to the change in
one's tax obligation as income rises is called _____.
a. the average tax rate
b. the statutory tax rate
c. the marginal tax rate
d. the effective tax rate - correct answer ✔✔c. the marginal tax rate
When evaluating the cash flows from a project, a financial manager needs to analyze the:
a. The costs and benefits of the project only
b. The benefits of the project only
c. The costs of the project only
d. costs, benefits, and opportunity costs of the project. - correct answer ✔✔d. costs, benefits,
and opportunity costs of the project.
Which of the following describes an advantage the internal rate of return has over net present
value for capital budgeting purposes?
a. All of these answers.
b. The IRR method recognizes the firm's opportunity costs.
c. Internal rate of return is an indicator of the efficiency, quality or yield of an investment.
d. The IRR method adjusts for the riskiness (or uncertainty) of the projected cash flows - correct
answer ✔✔c. Internal rate of return is an indicator of the efficiency, quality or yield of an
investment.
Practice Questions (2026)
A company is analyzing a variety of potential investments using different capital budgeting
methods. Which of the following represents the most profitable choice based on the
information provided?
a. The company picks a project with an accounting rate of return 5% over one with an ARR of
3%.
b. The company picks a project with an NPV of $250,000 over one with an NPV of $300,000.
c. The company picks a project with profitability index of 1.25 over a project with a PI of -.25.
d. The company picks a project with a 5 year payback period over one with a 3 year payback
period. - correct answer ✔✔c. The company picks a project with profitability index of 1.25 over
a project with a PI of -.25.
A firm is trying to choose the most profitable project to invest in. Which of the following should
be used as the company's discount rate?
a. The company's reinvestment rate or weighted average cost of capital.
b. The company's weighted average cost of capital.
c. The company's profitability index.
d. The projects' average internal rate of return. - correct answer ✔✔a. The company's
reinvestment rate or weighted average cost of capital.
Calculate the discounted payback period for a project with a discount rate of 5% the following
cash flows:Year 0: -$2000Year 1: $1000Year 2: -$1000Year 3: $1000Year 4: $3000Year 5: $2000 -
correct answer ✔✔3.44 years.
In which of the following situations would it be appropriate to use the IRR method to make an
investment decision?
a. To compare two investments that have different durations.
, b. To assess a project which cash flows fluctuate between positive and negative.
c. All of these answers.
d. To compare two projects that have an equal initial investment and lifespan - correct answer
✔✔d. To compare two projects that have an equal initial investment and lifespan.
The tax rate that applies to the last dollar of the tax base and is often applied to the change in
one's tax obligation as income rises is called _____.
a. the average tax rate
b. the statutory tax rate
c. the marginal tax rate
d. the effective tax rate - correct answer ✔✔c. the marginal tax rate
When evaluating the cash flows from a project, a financial manager needs to analyze the:
a. The costs and benefits of the project only
b. The benefits of the project only
c. The costs of the project only
d. costs, benefits, and opportunity costs of the project. - correct answer ✔✔d. costs, benefits,
and opportunity costs of the project.
Which of the following describes an advantage the internal rate of return has over net present
value for capital budgeting purposes?
a. All of these answers.
b. The IRR method recognizes the firm's opportunity costs.
c. Internal rate of return is an indicator of the efficiency, quality or yield of an investment.
d. The IRR method adjusts for the riskiness (or uncertainty) of the projected cash flows - correct
answer ✔✔c. Internal rate of return is an indicator of the efficiency, quality or yield of an
investment.
