FNAN 522 Exam 2 Review – Complete Finance Study Guide & Practice Test (2026)
A company is considering a project that has a discount rate of 5%. It will require an initial
investment of $200,000. In the first year, it will have $100,000 in net cash inflows (one year after
the initial investment). In year 2, it will have cash inflows of $100,000 (two years after the initial
investment), and in year 3 the project will generate $200,000 (three years after the initial
investment). What is the project’s NPV? Assume all cash flows occur at the end of the year. -
correct answer ✔✔$158,709
A project has an initial investment requirement of $100,000. In year 1 it should earn $25,000; in
year two, $30,000; and in year 3, $50,000. What is the project's internal rate of return? Assume
the cash flows in years one, two, and three happen at the end of the year. - correct answer
✔✔2.21%
In which of the following situations would it be appropriate to use the IRR method to make an
investment decision?
-all of these
-To compare two projects that have an equal investment and lifespan.
-To compare two investments that have different durations
-to assess a project which cash flows fluctuate between positive and negative - correct answer
✔✔To compare two projects that have an equal initial investment and lifespan
Under the internal rate of return rule in capital budgeting, which of the following statements
CANNOT be true?
-The cash inflows can be estimates
-The internal rate of return can be equal to the cost of capital.
-The initial investment can be the cost from purchasing new equipment.
, -The internal rate of return can vary throughout the life of a project - correct answer ✔✔The
internal rate of return can vary throughout the life of a project
You have just been offered a contract worth $5.6 million per year for 3 years. However, to take
the contract, you will need to purchase some new equipment. Your discount rate for this project
is 15.3%. You are still negotiating the purchase price of the equipment. What is the most you
can pay for the equipment and still have a positive NPV? - correct answer ✔✔$12.6 Million
Which of the following could be sunk cost?
-Labor hours spent on planning project
-All of these answers
-Equipment purchased to pursue a project
-A feasibility study that attempted to determine the economic viability of a project - correct
answer ✔✔all of these answers
Which of the following is an example of an opportunity cost?
-All of these answers
-If invest in one of two projects, the cost is the lost revenue from the other project
-if you buy a candy bar instead of a soda, the cost is thirst
-If you watch a game instead of going for a run, the cost is poorer. personal health - correct
answer ✔✔all of these answers
Which of the following is the best reason to use the payback method to evaluate investments?
-If you use the payback method, you do not need to perform additional analyses
-The payback method is easy to use and understand for most people, regardless of training.
A company is considering a project that has a discount rate of 5%. It will require an initial
investment of $200,000. In the first year, it will have $100,000 in net cash inflows (one year after
the initial investment). In year 2, it will have cash inflows of $100,000 (two years after the initial
investment), and in year 3 the project will generate $200,000 (three years after the initial
investment). What is the project’s NPV? Assume all cash flows occur at the end of the year. -
correct answer ✔✔$158,709
A project has an initial investment requirement of $100,000. In year 1 it should earn $25,000; in
year two, $30,000; and in year 3, $50,000. What is the project's internal rate of return? Assume
the cash flows in years one, two, and three happen at the end of the year. - correct answer
✔✔2.21%
In which of the following situations would it be appropriate to use the IRR method to make an
investment decision?
-all of these
-To compare two projects that have an equal investment and lifespan.
-To compare two investments that have different durations
-to assess a project which cash flows fluctuate between positive and negative - correct answer
✔✔To compare two projects that have an equal initial investment and lifespan
Under the internal rate of return rule in capital budgeting, which of the following statements
CANNOT be true?
-The cash inflows can be estimates
-The internal rate of return can be equal to the cost of capital.
-The initial investment can be the cost from purchasing new equipment.
, -The internal rate of return can vary throughout the life of a project - correct answer ✔✔The
internal rate of return can vary throughout the life of a project
You have just been offered a contract worth $5.6 million per year for 3 years. However, to take
the contract, you will need to purchase some new equipment. Your discount rate for this project
is 15.3%. You are still negotiating the purchase price of the equipment. What is the most you
can pay for the equipment and still have a positive NPV? - correct answer ✔✔$12.6 Million
Which of the following could be sunk cost?
-Labor hours spent on planning project
-All of these answers
-Equipment purchased to pursue a project
-A feasibility study that attempted to determine the economic viability of a project - correct
answer ✔✔all of these answers
Which of the following is an example of an opportunity cost?
-All of these answers
-If invest in one of two projects, the cost is the lost revenue from the other project
-if you buy a candy bar instead of a soda, the cost is thirst
-If you watch a game instead of going for a run, the cost is poorer. personal health - correct
answer ✔✔all of these answers
Which of the following is the best reason to use the payback method to evaluate investments?
-If you use the payback method, you do not need to perform additional analyses
-The payback method is easy to use and understand for most people, regardless of training.
