BFIN 300 Final Review!
BFIN 300 Final Review
Net Present Value (NPV) - CORRECT ANSWER-the sum of the present values
of expected future cash flows from an investment, minus the cost of that
investment. If NPV is negative you will reject the investment
Payback Period Rule - CORRECT ANSWER-an investment is acceptable if its
calculated payback period is less than some pre-specified number of years
Discounted Payback Period - CORRECT ANSWER-the length of time required
for an investment's discounted cash flows to equal its initial cost
Average Accounting Return - CORRECT ANSWER-an investment's average net
income divided by its average book value
Internal Rate of Return (IRR) - CORRECT ANSWER-The discount rate that
makes the NPV of an investment zero. (Value at end of term - Initial Investment)/
Initial Investment
Profitability Index - CORRECT ANSWER-the present value of an investment's
future cash flows divided by its initial cost
You purchase a run-down home in Albany for $25,000 and spend another
$25,000 to repair it. Your total in-cost is $50,000. When the work is done, you
place the home back on the market and find that it's worth $60,000. What is your
NPV?
a) Zero b) $10,000 c) $25,000 d) $50,000 e) $60,000 - CORRECT
ANSWER-$10,000
What is the difference between an investment's market value and cost?
a) Internal Rate of Return (IRR) b) Net Present Value (NPV) c) Capital budgeting
process d) Discounted Cash Flow (DCF) e) All of the above - CORRECT
ANSWER-Net present value
As a financial manager, what will you do with an investment if its Net Present
Value (NPV) is negative?
Page 1 of 11
, BFIN 300 Final Review!
a) Estimate the cash flows of the business b) Reject the investment c) Accept the
investment d) Be agnostic with the investment e) None of the above - CORRECT
ANSWER-Reject the investment
Which investment technique yields the same result as Net Present Value (NPV)?
a) Payback Rule b) Discounted Payback Period c) Internal Rate of Return d)
Average Accounting Return e) Profitability Index - CORRECT ANSWER-Internal
rate of return (IRR)
Which statement is true regarding the Internal Rate of Return (IRR)?
a) It is the most important alternative to Net Present Value b) The IRR is a single
rate of return which summarizes the merits of the project c) It is the discount rate
which makes the Net Present Value of an investment equate to zero d) An
investment is acceptable if its IRR exceeds the required return e) All of the above
- CORRECT ANSWER-all of the above
Discounted Cash Flow Analysis - CORRECT ANSWER-an investment valuation
technique that considers anticipated changes in cash flows over years, projects
the current value of net proceeds from the sale of the property in the future, and
accounts for the time value of money.
Relevant Cash Flow - CORRECT ANSWER-a change in the firm's overall future
cash flow that comes about as a direct consequence of the decision to take that
project
Incremental Cash Flow - CORRECT ANSWER-the difference between the cash
flows a company will produce both with and without the investment it is thinking
about making
Standalone Basis - CORRECT ANSWER-meaning the valuation is based on the
cash flows generated by the specific project or investment being evaluated. This
is in contrast to considering the impact within the context of the entire firm.
Sunk Costs - CORRECT ANSWER-costs that have already been incurred and
cannot be recovered
Page 2 of 11
BFIN 300 Final Review
Net Present Value (NPV) - CORRECT ANSWER-the sum of the present values
of expected future cash flows from an investment, minus the cost of that
investment. If NPV is negative you will reject the investment
Payback Period Rule - CORRECT ANSWER-an investment is acceptable if its
calculated payback period is less than some pre-specified number of years
Discounted Payback Period - CORRECT ANSWER-the length of time required
for an investment's discounted cash flows to equal its initial cost
Average Accounting Return - CORRECT ANSWER-an investment's average net
income divided by its average book value
Internal Rate of Return (IRR) - CORRECT ANSWER-The discount rate that
makes the NPV of an investment zero. (Value at end of term - Initial Investment)/
Initial Investment
Profitability Index - CORRECT ANSWER-the present value of an investment's
future cash flows divided by its initial cost
You purchase a run-down home in Albany for $25,000 and spend another
$25,000 to repair it. Your total in-cost is $50,000. When the work is done, you
place the home back on the market and find that it's worth $60,000. What is your
NPV?
a) Zero b) $10,000 c) $25,000 d) $50,000 e) $60,000 - CORRECT
ANSWER-$10,000
What is the difference between an investment's market value and cost?
a) Internal Rate of Return (IRR) b) Net Present Value (NPV) c) Capital budgeting
process d) Discounted Cash Flow (DCF) e) All of the above - CORRECT
ANSWER-Net present value
As a financial manager, what will you do with an investment if its Net Present
Value (NPV) is negative?
Page 1 of 11
, BFIN 300 Final Review!
a) Estimate the cash flows of the business b) Reject the investment c) Accept the
investment d) Be agnostic with the investment e) None of the above - CORRECT
ANSWER-Reject the investment
Which investment technique yields the same result as Net Present Value (NPV)?
a) Payback Rule b) Discounted Payback Period c) Internal Rate of Return d)
Average Accounting Return e) Profitability Index - CORRECT ANSWER-Internal
rate of return (IRR)
Which statement is true regarding the Internal Rate of Return (IRR)?
a) It is the most important alternative to Net Present Value b) The IRR is a single
rate of return which summarizes the merits of the project c) It is the discount rate
which makes the Net Present Value of an investment equate to zero d) An
investment is acceptable if its IRR exceeds the required return e) All of the above
- CORRECT ANSWER-all of the above
Discounted Cash Flow Analysis - CORRECT ANSWER-an investment valuation
technique that considers anticipated changes in cash flows over years, projects
the current value of net proceeds from the sale of the property in the future, and
accounts for the time value of money.
Relevant Cash Flow - CORRECT ANSWER-a change in the firm's overall future
cash flow that comes about as a direct consequence of the decision to take that
project
Incremental Cash Flow - CORRECT ANSWER-the difference between the cash
flows a company will produce both with and without the investment it is thinking
about making
Standalone Basis - CORRECT ANSWER-meaning the valuation is based on the
cash flows generated by the specific project or investment being evaluated. This
is in contrast to considering the impact within the context of the entire firm.
Sunk Costs - CORRECT ANSWER-costs that have already been incurred and
cannot be recovered
Page 2 of 11
