PRINCIPLES OF CORPORATE
FINANCE MANUAL 2025:
COMPREHENSIVE STUDY AND
APPLICATION GUIDE
The length of time a firm must wait to recoup the money it has invested in a project is called the:
A. Discounted payback period
B. Internal rate of return
C. Payback period
D. Profitability index
Rationale: The payback period measures how long it takes to recover the initial investment from
cash inflows. It does not consider time value of money.
The time required to recover, in present value terms, the investment made in a project is called
the:
A. Discounted payback period
B. Payback period
C. Profitability index
D. Modified IRR
Rationale: The discounted payback period accounts for the time value of money by discounting
future cash flows.
The net book value of equipment will:
A. Increase faster under MACRS
B. Remain constant under straight-line depreciation
C. Decrease slower under straight-line depreciation than under MACRS
D. Be the same under both methods
Rationale: Straight-line depreciation spreads cost evenly, while MACRS accelerates
depreciation in early years.
The operating cash flow for a project should exclude which of the following?
A. Taxes
B. Depreciation
C. Interest expense
,D. Changes in working capital
Rationale: Interest is a financing cost, not an operating one, and should be excluded from OCF.
The operating cash flow of a cost-cutting project:
A. Can be positive even if there are no sales
B. Must be negative if there are no sales
C. Is always zero
D. Depends on financing
Rationale: Cost savings increase cash flow even if no new sales occur.
The option foregone so that an asset can be used in a specific project is called:
A. Sunk cost
B. Incremental cost
C. Opportunity cost
D. Erosion
Rationale: Opportunity cost represents the benefit lost by choosing one use of an asset over
another.
The present value of an investment’s future cash flows divided by its initial cost is called the:
A. Internal rate of return
B. Net present value
C. Profitability index
D. Payback ratio
Rationale: Profitability index = PV of inflows ÷ initial investment.
The profitability index is most closely related to:
A. Net present value
B. Payback period
C. Accounting return
D. IRR
Rationale: Both NPV and PI measure value creation per dollar invested.
The stand-alone principle states that project analysis should be based on:
A. Total firm cash flow
B. Historical costs
C. Incremental cash flows
, D. Financing costs
Rationale: Only incremental cash flows—those directly caused by the project—should be
considered.
The top-down approach to computing OCF:
A. Includes noncash expenses
B. Ignores noncash expenses
C. Deducts interest first
D. Focuses on financing costs
Rationale: The top-down method starts from sales and subtracts cash costs, excluding
depreciation.
When a project has two distinct discount rates producing zero NPV, it is said to:
A. Be risk-free
B. Have no IRR
C. Have multiple rates of return
D. Be unprofitable
Rationale: Multiple IRRs occur when cash flows change signs more than once.
The after-tax salvage value of an asset equals:
A. Book value × tax rate
B. Sale price × (1 – tax rate)
C. Sale price + (book value – sale price) × tax rate
D. Sale price – tax rate
Rationale: The adjustment reflects taxes due or saved based on the difference between sale price
and book value.
A project operating above its accounting break-even level means it:
A. Is generating positive OCF
B. Is losing money
C. Has zero NPV
D. Has zero IRR
Rationale: Beyond the break-even level, revenues exceed costs, producing positive operating
cash flow.
FINANCE MANUAL 2025:
COMPREHENSIVE STUDY AND
APPLICATION GUIDE
The length of time a firm must wait to recoup the money it has invested in a project is called the:
A. Discounted payback period
B. Internal rate of return
C. Payback period
D. Profitability index
Rationale: The payback period measures how long it takes to recover the initial investment from
cash inflows. It does not consider time value of money.
The time required to recover, in present value terms, the investment made in a project is called
the:
A. Discounted payback period
B. Payback period
C. Profitability index
D. Modified IRR
Rationale: The discounted payback period accounts for the time value of money by discounting
future cash flows.
The net book value of equipment will:
A. Increase faster under MACRS
B. Remain constant under straight-line depreciation
C. Decrease slower under straight-line depreciation than under MACRS
D. Be the same under both methods
Rationale: Straight-line depreciation spreads cost evenly, while MACRS accelerates
depreciation in early years.
The operating cash flow for a project should exclude which of the following?
A. Taxes
B. Depreciation
C. Interest expense
,D. Changes in working capital
Rationale: Interest is a financing cost, not an operating one, and should be excluded from OCF.
The operating cash flow of a cost-cutting project:
A. Can be positive even if there are no sales
B. Must be negative if there are no sales
C. Is always zero
D. Depends on financing
Rationale: Cost savings increase cash flow even if no new sales occur.
The option foregone so that an asset can be used in a specific project is called:
A. Sunk cost
B. Incremental cost
C. Opportunity cost
D. Erosion
Rationale: Opportunity cost represents the benefit lost by choosing one use of an asset over
another.
The present value of an investment’s future cash flows divided by its initial cost is called the:
A. Internal rate of return
B. Net present value
C. Profitability index
D. Payback ratio
Rationale: Profitability index = PV of inflows ÷ initial investment.
The profitability index is most closely related to:
A. Net present value
B. Payback period
C. Accounting return
D. IRR
Rationale: Both NPV and PI measure value creation per dollar invested.
The stand-alone principle states that project analysis should be based on:
A. Total firm cash flow
B. Historical costs
C. Incremental cash flows
, D. Financing costs
Rationale: Only incremental cash flows—those directly caused by the project—should be
considered.
The top-down approach to computing OCF:
A. Includes noncash expenses
B. Ignores noncash expenses
C. Deducts interest first
D. Focuses on financing costs
Rationale: The top-down method starts from sales and subtracts cash costs, excluding
depreciation.
When a project has two distinct discount rates producing zero NPV, it is said to:
A. Be risk-free
B. Have no IRR
C. Have multiple rates of return
D. Be unprofitable
Rationale: Multiple IRRs occur when cash flows change signs more than once.
The after-tax salvage value of an asset equals:
A. Book value × tax rate
B. Sale price × (1 – tax rate)
C. Sale price + (book value – sale price) × tax rate
D. Sale price – tax rate
Rationale: The adjustment reflects taxes due or saved based on the difference between sale price
and book value.
A project operating above its accounting break-even level means it:
A. Is generating positive OCF
B. Is losing money
C. Has zero NPV
D. Has zero IRR
Rationale: Beyond the break-even level, revenues exceed costs, producing positive operating
cash flow.
