D076 Module 10 Question and
answers correctly solved 2025/2026
capital budgeting criteria - correct answer ✔metrics and calculations used to determine whether a
project or asset will add value and be a worthwhile investment
What indicates to a firm that a project will increase shareholder wealth? - correct answer ✔The NPV is
positive.
What part of the NPV calculation is very important but difficult to estimate? - correct answer ✔The cost
of capital
What is an advantage of using the NPV method? - correct answer ✔It calculates the dollar value that
would be added to the firm by doing the project.
What is a disadvantage of using the NPV method? - correct answer ✔It is not an effective way to
compare projects of different sizes.
internal rate of return (IRR) - correct answer ✔the rate of return that a firm earns on its capital projects
Advantages of NPV - correct answer ✔considers time value of money, calculates value added to the
firm, considers risk and required return
disadvantages of NPV - correct answer ✔requires calculations of appropriate cost of capital, is not
useful to compare projects of varying sizes
advantages of IRR - correct answer ✔is easy to interpret, considers time value of money, and does not
require use of required rate of return
, disadvantages of IRR - correct answer ✔is not a good indicator of the amount of value created, ignores
mutually exclusive projects, assumes reinvestment at the IRR rate, cannot be used to compare projects
with different durations, and requires conventional cash flows.
capital-constrained environment - correct answer ✔when a limited amount of funds are available
mutually exclusive - correct answer ✔when two or more events do not coincide
Suppose Alice is trying to explain to her friend, who knows nothing about the time value of money, why
she should invest in Alice's new company. Which method of valuation should Alice use to convince her
friend to invest? - correct answer ✔Internal rate of return (IRR)
Which NPV value indicates that the IRR has been reached? - correct answer ✔$0.00
Why is the IRR a poor valuation method for a project with unconventional cash flows? - correct answer
✔There are multiple sign changes in the calculation resulting in multiple IRRs, and it is impossible to tell
which IRR is the correct one.
A company called Bobby's Books is considering purchasing a new bookbinding machine. The company
calculates the hurdle rate of the project to be 9% and the IRR to be 11%. Should the company purchase
the bookbinding machine? - correct answer ✔Yes, because the IRR exceeds the cost of capital.
Profitability Index (PI) - correct answer ✔the ratio of payoff to investment for a proposed project
advantages of PI - correct answer ✔considers the time value of money, takes into account the risk of
future cash flows through the cost of capital, includes all future cash flows, indicates whether an
investment will create value for company
answers correctly solved 2025/2026
capital budgeting criteria - correct answer ✔metrics and calculations used to determine whether a
project or asset will add value and be a worthwhile investment
What indicates to a firm that a project will increase shareholder wealth? - correct answer ✔The NPV is
positive.
What part of the NPV calculation is very important but difficult to estimate? - correct answer ✔The cost
of capital
What is an advantage of using the NPV method? - correct answer ✔It calculates the dollar value that
would be added to the firm by doing the project.
What is a disadvantage of using the NPV method? - correct answer ✔It is not an effective way to
compare projects of different sizes.
internal rate of return (IRR) - correct answer ✔the rate of return that a firm earns on its capital projects
Advantages of NPV - correct answer ✔considers time value of money, calculates value added to the
firm, considers risk and required return
disadvantages of NPV - correct answer ✔requires calculations of appropriate cost of capital, is not
useful to compare projects of varying sizes
advantages of IRR - correct answer ✔is easy to interpret, considers time value of money, and does not
require use of required rate of return
, disadvantages of IRR - correct answer ✔is not a good indicator of the amount of value created, ignores
mutually exclusive projects, assumes reinvestment at the IRR rate, cannot be used to compare projects
with different durations, and requires conventional cash flows.
capital-constrained environment - correct answer ✔when a limited amount of funds are available
mutually exclusive - correct answer ✔when two or more events do not coincide
Suppose Alice is trying to explain to her friend, who knows nothing about the time value of money, why
she should invest in Alice's new company. Which method of valuation should Alice use to convince her
friend to invest? - correct answer ✔Internal rate of return (IRR)
Which NPV value indicates that the IRR has been reached? - correct answer ✔$0.00
Why is the IRR a poor valuation method for a project with unconventional cash flows? - correct answer
✔There are multiple sign changes in the calculation resulting in multiple IRRs, and it is impossible to tell
which IRR is the correct one.
A company called Bobby's Books is considering purchasing a new bookbinding machine. The company
calculates the hurdle rate of the project to be 9% and the IRR to be 11%. Should the company purchase
the bookbinding machine? - correct answer ✔Yes, because the IRR exceeds the cost of capital.
Profitability Index (PI) - correct answer ✔the ratio of payoff to investment for a proposed project
advantages of PI - correct answer ✔considers the time value of money, takes into account the risk of
future cash flows through the cost of capital, includes all future cash flows, indicates whether an
investment will create value for company
