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CORPORATE FINANCE – NPV & IRR EXAM PREP BANK 2026
| 100 EXAM-STYLE PRACTICE QUESTIONS WITH
DETAILED RATIONALES
Accounting / Finance / Corporate Finance
Exam coverage:
❖ Section 1 (Q1-25): NPV Fundamentals & Calculation
(formula, decision rule, discount rate impact,
advantages/limitations).
❖ Section 2 (Q26-50): IRR Fundamentals & Calculation
(definition, decision rule, reinvestment assumption, multiple
IRRs).
❖ Section 3 (Q51-75): NPV vs. IRR Comparison & Conflict
Resolution (crossover rate, mutually exclusive projects,
ranking conflicts).
❖ Section 4 (Q76-100): Advanced Applications (MIRR,
Profitability Index, payback, EAA, capital rationing, real
options).
SECTION 1: Question 1–25 – NPV Fundamentals &
Calculation
Question 1
A financial manager is evaluating a project with an initial
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investment of $200,000. The project is expected to generate
cash flows of $80,000 per year for three years. If the firm's
required rate of return is 10%, what is the project's Net Present
Value (NPV)?
A. $198,948
B. -$1,052
C. $40,000
D. $240,000
CORRECT ANSWER: B ✓
RATIONALE: NPV = Present value of cash inflows - Initial
investment. PVIFA(10%, 3) = 2.48685. PV of inflows = $80,000 ×
2.48685 = $198,948. NPV = $198,948 - $200,000 = -$1,052. A
negative NPV indicates the project should be rejected.
Question 2
Which of the following statements correctly describes the NPV
decision rule for an independent project?
A. Accept the project if NPV is negative.
B. Accept the project if NPV is positive.
C. Accept the project only if NPV equals zero.
D. NPV is irrelevant for independent projects.
CORRECT ANSWER: B ✓
RATIONALE: The NPV decision rule states that an independent
project should be accepted if its NPV is positive (NPV > 0), as it
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adds value to the firm. A project with NPV = 0 earns exactly the
required return, and a negative NPV destroys value.
Question 3
The NPV of a project is calculated as:
A. Future value of cash inflows minus future value of cash
outflows.
B. Present value of cash inflows minus present value of cash
outflows.
C. Present value of cash inflows minus future value of cash
outflows.
D. Future value of cash inflows minus present value of cash
outflows.
CORRECT ANSWER: B ✓
RATIONALE: NPV = Present value of cash inflows - Present
value of cash outflows. All cash flows are discounted to the
present at the appropriate discount rate. This is the
fundamental definition of NPV in capital budgeting.
Question 4
A company is considering a project with an initial cost of
$500,000 and expected cash flows of $150,000 per year for five
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years. If the discount rate is 12%, what is the NPV?
A. $40,717
B. $50,000
C. $250,000
D. -$40,717
CORRECT ANSWER: A ✓
RATIONALE: PVIFA(12%, 5) = 3.60478. PV of inflows = $150,000
× 3.60478 = $540,717. NPV = $540,717 - $500,000 = $40,717. A
positive NPV indicates the project should be accepted.
Question 5
Which of the following is a key advantage of using NPV as a
capital budgeting technique?
A. It ignores the time value of money.
B. It considers all cash flows and the time value of money.
C. It is expressed as a percentage.
D. It is easier to calculate than the payback period.
CORRECT ANSWER: B ✓
RATIONALE: NPV considers all cash flows of the project and
explicitly incorporates the time value of money by discounting
them at the required rate of return. NPV is expressed in dollar
terms, not percentage, and requires a discount rate.
CORPORATE FINANCE – NPV & IRR EXAM PREP BANK 2026
| 100 EXAM-STYLE PRACTICE QUESTIONS WITH
DETAILED RATIONALES
Accounting / Finance / Corporate Finance
Exam coverage:
❖ Section 1 (Q1-25): NPV Fundamentals & Calculation
(formula, decision rule, discount rate impact,
advantages/limitations).
❖ Section 2 (Q26-50): IRR Fundamentals & Calculation
(definition, decision rule, reinvestment assumption, multiple
IRRs).
❖ Section 3 (Q51-75): NPV vs. IRR Comparison & Conflict
Resolution (crossover rate, mutually exclusive projects,
ranking conflicts).
❖ Section 4 (Q76-100): Advanced Applications (MIRR,
Profitability Index, payback, EAA, capital rationing, real
options).
SECTION 1: Question 1–25 – NPV Fundamentals &
Calculation
Question 1
A financial manager is evaluating a project with an initial
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investment of $200,000. The project is expected to generate
cash flows of $80,000 per year for three years. If the firm's
required rate of return is 10%, what is the project's Net Present
Value (NPV)?
A. $198,948
B. -$1,052
C. $40,000
D. $240,000
CORRECT ANSWER: B ✓
RATIONALE: NPV = Present value of cash inflows - Initial
investment. PVIFA(10%, 3) = 2.48685. PV of inflows = $80,000 ×
2.48685 = $198,948. NPV = $198,948 - $200,000 = -$1,052. A
negative NPV indicates the project should be rejected.
Question 2
Which of the following statements correctly describes the NPV
decision rule for an independent project?
A. Accept the project if NPV is negative.
B. Accept the project if NPV is positive.
C. Accept the project only if NPV equals zero.
D. NPV is irrelevant for independent projects.
CORRECT ANSWER: B ✓
RATIONALE: The NPV decision rule states that an independent
project should be accepted if its NPV is positive (NPV > 0), as it
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adds value to the firm. A project with NPV = 0 earns exactly the
required return, and a negative NPV destroys value.
Question 3
The NPV of a project is calculated as:
A. Future value of cash inflows minus future value of cash
outflows.
B. Present value of cash inflows minus present value of cash
outflows.
C. Present value of cash inflows minus future value of cash
outflows.
D. Future value of cash inflows minus present value of cash
outflows.
CORRECT ANSWER: B ✓
RATIONALE: NPV = Present value of cash inflows - Present
value of cash outflows. All cash flows are discounted to the
present at the appropriate discount rate. This is the
fundamental definition of NPV in capital budgeting.
Question 4
A company is considering a project with an initial cost of
$500,000 and expected cash flows of $150,000 per year for five
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years. If the discount rate is 12%, what is the NPV?
A. $40,717
B. $50,000
C. $250,000
D. -$40,717
CORRECT ANSWER: A ✓
RATIONALE: PVIFA(12%, 5) = 3.60478. PV of inflows = $150,000
× 3.60478 = $540,717. NPV = $540,717 - $500,000 = $40,717. A
positive NPV indicates the project should be accepted.
Question 5
Which of the following is a key advantage of using NPV as a
capital budgeting technique?
A. It ignores the time value of money.
B. It considers all cash flows and the time value of money.
C. It is expressed as a percentage.
D. It is easier to calculate than the payback period.
CORRECT ANSWER: B ✓
RATIONALE: NPV considers all cash flows of the project and
explicitly incorporates the time value of money by discounting
them at the required rate of return. NPV is expressed in dollar
terms, not percentage, and requires a discount rate.
