MBA 704 CORPORATE FINANCE
150 MASTER EXAM QUESTIONS
and COMPREHENSIVE
RATIONALES 2026 2027
MBA 704: Corporate Financial Management (Module 2
Master Exam)
Question 1
A multinational corporation is evaluating a capital budgeting
project in Kenya. The initial cash outlay is KSh 450,000,000,
and the project is expected to generate free cash flows of KSh
150,000,000 per year for the next four years. If the corporate
Weighted Average Cost of Capital (WACC) is 10%, what is the
Net Present Value (NPV) of this project, and should the firm
proceed?
A. NPV = KSh 25,481,500; Accept the project because
the NPV is positive, meaning it creates shareholder
value.
B. NPV = -KSh 15,000,200; Reject the project because it
destroys internal corporate capital stacks.
C. NPV = KSh 150,000,000; Accept the project because total
nominal cash inflows exceed outflows.
D. NPV = KSh 0; The firm is indifferent as the internal rate of
return exactly equals the tax rate.
Correct Answer: A. NPV = KSh 25,481,500; Accept
the project because the NPV is positive, meaning it
creates shareholder value.
Rationale: The present value of an annuity factor for 4
years at 10% is approximately 3.169865. Multiplying this
factor by the annual cash flow of KSh 150,000,000 yields a
,Present Value of Inflows equal to KSh 475,479,750 (exact
calculation using \(PV = \sum [CF_t / (1+r)^t]\) equals KSh
475,481,500). Subtracting the initial investment of KSh
450,000,000 results in a positive Net Present Value of KSh
25,481,500. Corporate financial theory dictates that projects
with an NPV greater than zero add value to the firm and
should be accepted.
Question 2
An operations manager presents a project with a conventional
cash flow pattern showing an Internal Rate of Return (IRR) of
18%. The firm’s current hurdle rate is 12%. However, the Chief
Financial Officer objects, citing a capital rationing constraint
and arguing that the Net Present Value (NPV) method should
override IRR if rankings conflict. What is the primary
theoretical reason why the NPV method is superior to the IRR
method in this context?
A. The IRR method assumes cash inflows are reinvested at the
hurdle rate, which is overly conservative.
B. The NPV method assumes cash flows are reinvested
at the cost of capital, whereas IRR assumes
reinvestment at the IRR itself, which can lead to
unrealistic return assumptions for highly profitable
projects.
C. The IRR method cannot account for changes in the corporate
tax shield or straight-line depreciation vectors.
D. The NPV method completely eliminates the need to calculate
the project’s discounted payback period.
Correct Answer: B. The NPV method assumes cash
flows are reinvested at the cost of capital, whereas IRR
assumes reinvestment at the IRR itself, which can lead
to unrealistic return assumptions for highly profitable
projects.
Rationale: The core theoretical conflict between NPV and
IRR lies in the reinvestment rate assumption. NPV assumes
,intermediate cash flows are reinvested at the firm's cost of
capital (a realistic assumption), while IRR assumes
reinvestment at the project’s specific IRR. When evaluating
mutually exclusive projects under capital rationing, the NPV
method always provides the correct decision for maximizing
absolute wealth.
Question 3
A logistics firm wants to expand its delivery fleet by purchasing
advanced autonomous electric trucks. The initial cash
investment required is $1,200,000. The project has a
Profitability Index (PI) of 1.15. Based on this metric alone, what
is the exact Net Present Value (NPV) of this fleet expansion
project?
A. NPV = $1,380,000
B. NPV = $180,000
C. NPV = -$180,000
D. NPV = $1,200,000
Correct Answer: B. NPV = $180,000
Rationale: The Profitability Index (PI) is calculated as the
Present Value of Future Cash Inflows divided by the Initial
Investment Allocation (\(PI = PV / I_0\)). A PI of 1.15 implies
that the PV of inflows is \(\$1,200,000 \times 1.15 =
\$1,380,000\). Since \(NPV = PV - I_0\), the Net Present
Value is equal to $1,380,000 - $1,200,000 = $180,000.
Because the PI is greater than 1.0 (and the NPV is positive), the
project should be accepted.
Question 4
An executive board is evaluating two mutually exclusive, scale-
disparate infrastructure projects. Project X requires
$10,000,000 upfront and generates an NPV of $2,000,000.
Project Y requires $1,000,000 upfront and generates an NPV
of $500,000. Under strict capital constraints where absolute
wealth creation is the sole metric, how should the board
, proceed?
A. Select Project Y because it has a higher internal rate of return
relative to its scale.
B. Select Project X because it yields a higher absolute
Net Present Value, directly maximizing the total dollar
value added to shareholder wealth.
C. Reject both projects because mutually exclusive choices
invalidate the standard WACC baseline model.
D. Select both projects simultaneously and borrow high-interest
mezzanine debt to fund the deficit.
Correct Answer: B. Select Project X because it yields
a higher absolute Net Present Value, directly
maximizing the total dollar value added to
shareholder wealth.
Rationale: When choosing between mutually exclusive
projects, the firm can pick one or the other, but not both. Even
though Project Y has a higher percentage return relative to its
size (higher PI), Project X creates $2,000,000 in absolute
dollar value for shareholders compared to Project Y’s
$500,000. Absolute NPV is the primary metric for wealth
maximization when capital can be raised for the chosen
alternative.
Question 5
A manufacturing corporation utilizes a 14% discount rate for its
standard business investments. A new automated assembly line
project has an initial cost of $500,000 and will generate free
cash flows of $200,000 in Year 1, $300,000 in Year 2, and
$400,000 in Year 3. What is the project's discounted payback
period?
A. 1.00 year
B. 2.52 years
C. 2.14 years
D. 3.00 years
Correct Answer: C. 2.14 years
150 MASTER EXAM QUESTIONS
and COMPREHENSIVE
RATIONALES 2026 2027
MBA 704: Corporate Financial Management (Module 2
Master Exam)
Question 1
A multinational corporation is evaluating a capital budgeting
project in Kenya. The initial cash outlay is KSh 450,000,000,
and the project is expected to generate free cash flows of KSh
150,000,000 per year for the next four years. If the corporate
Weighted Average Cost of Capital (WACC) is 10%, what is the
Net Present Value (NPV) of this project, and should the firm
proceed?
A. NPV = KSh 25,481,500; Accept the project because
the NPV is positive, meaning it creates shareholder
value.
B. NPV = -KSh 15,000,200; Reject the project because it
destroys internal corporate capital stacks.
C. NPV = KSh 150,000,000; Accept the project because total
nominal cash inflows exceed outflows.
D. NPV = KSh 0; The firm is indifferent as the internal rate of
return exactly equals the tax rate.
Correct Answer: A. NPV = KSh 25,481,500; Accept
the project because the NPV is positive, meaning it
creates shareholder value.
Rationale: The present value of an annuity factor for 4
years at 10% is approximately 3.169865. Multiplying this
factor by the annual cash flow of KSh 150,000,000 yields a
,Present Value of Inflows equal to KSh 475,479,750 (exact
calculation using \(PV = \sum [CF_t / (1+r)^t]\) equals KSh
475,481,500). Subtracting the initial investment of KSh
450,000,000 results in a positive Net Present Value of KSh
25,481,500. Corporate financial theory dictates that projects
with an NPV greater than zero add value to the firm and
should be accepted.
Question 2
An operations manager presents a project with a conventional
cash flow pattern showing an Internal Rate of Return (IRR) of
18%. The firm’s current hurdle rate is 12%. However, the Chief
Financial Officer objects, citing a capital rationing constraint
and arguing that the Net Present Value (NPV) method should
override IRR if rankings conflict. What is the primary
theoretical reason why the NPV method is superior to the IRR
method in this context?
A. The IRR method assumes cash inflows are reinvested at the
hurdle rate, which is overly conservative.
B. The NPV method assumes cash flows are reinvested
at the cost of capital, whereas IRR assumes
reinvestment at the IRR itself, which can lead to
unrealistic return assumptions for highly profitable
projects.
C. The IRR method cannot account for changes in the corporate
tax shield or straight-line depreciation vectors.
D. The NPV method completely eliminates the need to calculate
the project’s discounted payback period.
Correct Answer: B. The NPV method assumes cash
flows are reinvested at the cost of capital, whereas IRR
assumes reinvestment at the IRR itself, which can lead
to unrealistic return assumptions for highly profitable
projects.
Rationale: The core theoretical conflict between NPV and
IRR lies in the reinvestment rate assumption. NPV assumes
,intermediate cash flows are reinvested at the firm's cost of
capital (a realistic assumption), while IRR assumes
reinvestment at the project’s specific IRR. When evaluating
mutually exclusive projects under capital rationing, the NPV
method always provides the correct decision for maximizing
absolute wealth.
Question 3
A logistics firm wants to expand its delivery fleet by purchasing
advanced autonomous electric trucks. The initial cash
investment required is $1,200,000. The project has a
Profitability Index (PI) of 1.15. Based on this metric alone, what
is the exact Net Present Value (NPV) of this fleet expansion
project?
A. NPV = $1,380,000
B. NPV = $180,000
C. NPV = -$180,000
D. NPV = $1,200,000
Correct Answer: B. NPV = $180,000
Rationale: The Profitability Index (PI) is calculated as the
Present Value of Future Cash Inflows divided by the Initial
Investment Allocation (\(PI = PV / I_0\)). A PI of 1.15 implies
that the PV of inflows is \(\$1,200,000 \times 1.15 =
\$1,380,000\). Since \(NPV = PV - I_0\), the Net Present
Value is equal to $1,380,000 - $1,200,000 = $180,000.
Because the PI is greater than 1.0 (and the NPV is positive), the
project should be accepted.
Question 4
An executive board is evaluating two mutually exclusive, scale-
disparate infrastructure projects. Project X requires
$10,000,000 upfront and generates an NPV of $2,000,000.
Project Y requires $1,000,000 upfront and generates an NPV
of $500,000. Under strict capital constraints where absolute
wealth creation is the sole metric, how should the board
, proceed?
A. Select Project Y because it has a higher internal rate of return
relative to its scale.
B. Select Project X because it yields a higher absolute
Net Present Value, directly maximizing the total dollar
value added to shareholder wealth.
C. Reject both projects because mutually exclusive choices
invalidate the standard WACC baseline model.
D. Select both projects simultaneously and borrow high-interest
mezzanine debt to fund the deficit.
Correct Answer: B. Select Project X because it yields
a higher absolute Net Present Value, directly
maximizing the total dollar value added to
shareholder wealth.
Rationale: When choosing between mutually exclusive
projects, the firm can pick one or the other, but not both. Even
though Project Y has a higher percentage return relative to its
size (higher PI), Project X creates $2,000,000 in absolute
dollar value for shareholders compared to Project Y’s
$500,000. Absolute NPV is the primary metric for wealth
maximization when capital can be raised for the chosen
alternative.
Question 5
A manufacturing corporation utilizes a 14% discount rate for its
standard business investments. A new automated assembly line
project has an initial cost of $500,000 and will generate free
cash flows of $200,000 in Year 1, $300,000 in Year 2, and
$400,000 in Year 3. What is the project's discounted payback
period?
A. 1.00 year
B. 2.52 years
C. 2.14 years
D. 3.00 years
Correct Answer: C. 2.14 years
