Finance Skills for Managers - D076
Unit 6 Questions with complete
solution 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.
NPV (net present value) - correct answer ✔it is the sum (or net) of the present values of all of the
project's expected cash inflows and outflows. (The term net refers to what is left over after all costs are
deducted).
The net present value is calculated by - correct answer ✔summing the present values of all expected
cash inflows and then subtracting the present value of expected cash outflows such as the initial outlay,
which is the cost of doing the project today. The resulting net present value tells you how much value is
created in today's dollars after accounting for the cost of doing the project.
Fundamentally, net present value answers this question: - correct answer ✔If NPV is positive, you
should accept the project. If NPV is negative, you should reject the project. If NPV is positive, it means
that the project is potentially profitable and will add value to shareholder wealth. If negative, the project
will destroy shareholder wealth.
There are multiple advantages of the NPV method, three of which will be discussed in this lesson. The
NPV method: - correct answer ✔Considers time value of money
Calculates value added to the firm
Considers risk and required return
the NPV considers the time value of money - correct answer ✔It takes into account the idea that
today's dollar is worth more than a dollar in the future. Each and every period, cash flows are
discounted to the present time so you can compare costs and benefits at different points in time as if
they were at the same point in time in period 0.
,Another advantage of the NPV method is that it tells you how much value is.... - correct answer
✔added to the firm with the investment project. The NPV is a dollar amount, so if you calculate the NPV
of $15,000, you are adding $15,000 to the firm's value by doing the project at today's value.
NPV method is that it takes risk into account by considering... - correct answer ✔the required rate of
return, or cost of capital, as a discount rate. Each investment and each year of cash flows has different
inherent risks.
While NPV is the best method to use for capital investment decisions, it has some disadvantages. -
correct answer ✔Requires calculation of appropriate cost of capital
Is not useful to compare projects of varying sizes
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.
, Mathematically, the IRR is the rate of return that makes the NPV of the project.... - correct answer
✔equal to zero.This is because it is the rate of return that makes the present value of the cash inflows
exactly equal the present value of the cash outflows
If the return or the IRR exceeds the cost of capital, - correct answer ✔you should accept the project
if the IRR is short of the cost of capital, - correct answer ✔you should reject the project.
Consider the advantages of the IRR method. The IRR: - correct answer ✔is easy to interpret,
considers time value of money, and
does not require use of required rate of return.
one of the biggest advantages of using the IRR method is that it is easy to interpret. - correct answer
✔It gives you the rate of return for the initial investment you put in for the project. If the IRR is
calculated to be 12% on a new project with an initial investment of $150,000, it means that you will earn
a 12% return on your investment of $150,000, pretty straight forward
Similar to the NPV method, IRR also considers the time value of money. - correct answer ✔The purpose
of calculating the IRR is to look for the exact rate at which the sum of all the discounted future cash
flows is equal to the initial investment. In the IRR calculation, the timing of every future cash flow is
considered and discounted appropriately.
In addition, management does not have to estimate the required rate of return to calculate the IRR. -
correct answer ✔The required rate of return can be difficult to calculate, and is often subjective based
on the assumptions made in terms of the value added, alternative opportunities, and how risky analysts
feel the project is. To calculate the NPV, for instance, you must first calculate an appropriate and
accurate required rate of return, which can take substantial time and effort.
There are several disadvantages of the IRR method. The IRR: - correct answer ✔is not a good indicator
of the amount of value created,
ignores mutually exclusive projects,
Unit 6 Questions with complete
solution 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.
NPV (net present value) - correct answer ✔it is the sum (or net) of the present values of all of the
project's expected cash inflows and outflows. (The term net refers to what is left over after all costs are
deducted).
The net present value is calculated by - correct answer ✔summing the present values of all expected
cash inflows and then subtracting the present value of expected cash outflows such as the initial outlay,
which is the cost of doing the project today. The resulting net present value tells you how much value is
created in today's dollars after accounting for the cost of doing the project.
Fundamentally, net present value answers this question: - correct answer ✔If NPV is positive, you
should accept the project. If NPV is negative, you should reject the project. If NPV is positive, it means
that the project is potentially profitable and will add value to shareholder wealth. If negative, the project
will destroy shareholder wealth.
There are multiple advantages of the NPV method, three of which will be discussed in this lesson. The
NPV method: - correct answer ✔Considers time value of money
Calculates value added to the firm
Considers risk and required return
the NPV considers the time value of money - correct answer ✔It takes into account the idea that
today's dollar is worth more than a dollar in the future. Each and every period, cash flows are
discounted to the present time so you can compare costs and benefits at different points in time as if
they were at the same point in time in period 0.
,Another advantage of the NPV method is that it tells you how much value is.... - correct answer
✔added to the firm with the investment project. The NPV is a dollar amount, so if you calculate the NPV
of $15,000, you are adding $15,000 to the firm's value by doing the project at today's value.
NPV method is that it takes risk into account by considering... - correct answer ✔the required rate of
return, or cost of capital, as a discount rate. Each investment and each year of cash flows has different
inherent risks.
While NPV is the best method to use for capital investment decisions, it has some disadvantages. -
correct answer ✔Requires calculation of appropriate cost of capital
Is not useful to compare projects of varying sizes
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.
, Mathematically, the IRR is the rate of return that makes the NPV of the project.... - correct answer
✔equal to zero.This is because it is the rate of return that makes the present value of the cash inflows
exactly equal the present value of the cash outflows
If the return or the IRR exceeds the cost of capital, - correct answer ✔you should accept the project
if the IRR is short of the cost of capital, - correct answer ✔you should reject the project.
Consider the advantages of the IRR method. The IRR: - correct answer ✔is easy to interpret,
considers time value of money, and
does not require use of required rate of return.
one of the biggest advantages of using the IRR method is that it is easy to interpret. - correct answer
✔It gives you the rate of return for the initial investment you put in for the project. If the IRR is
calculated to be 12% on a new project with an initial investment of $150,000, it means that you will earn
a 12% return on your investment of $150,000, pretty straight forward
Similar to the NPV method, IRR also considers the time value of money. - correct answer ✔The purpose
of calculating the IRR is to look for the exact rate at which the sum of all the discounted future cash
flows is equal to the initial investment. In the IRR calculation, the timing of every future cash flow is
considered and discounted appropriately.
In addition, management does not have to estimate the required rate of return to calculate the IRR. -
correct answer ✔The required rate of return can be difficult to calculate, and is often subjective based
on the assumptions made in terms of the value added, alternative opportunities, and how risky analysts
feel the project is. To calculate the NPV, for instance, you must first calculate an appropriate and
accurate required rate of return, which can take substantial time and effort.
There are several disadvantages of the IRR method. The IRR: - correct answer ✔is not a good indicator
of the amount of value created,
ignores mutually exclusive projects,
