FINC 3610 Exam 3 Practice Questions & Answers
(Verified Update)
This comprehensive study guide covers the core domains tested
on FINC 3610 Exam 3: Capital Budgeting Dynamics at Auburn
University. It includes original practice questions with detailed
rationales, organized by the core exam domains: Net Present
Value (NPV) , Internal Rate of Return (IRR) , Profitability Index
(PI) , Payback Period & Discounted Payback, and Capital
Rationing & Project Selection.
Exam Overview & Blueprint:
Parameter Details
Exam
Multiple-choice, true/false, and calculation-based questions
Format
NPV, IRR, PI, payback period, discounted payback, mutually exclusive projects,
Core Topics
capital rationing
Key NPV = PV(inflows) – Initial Cost; PI = PV(inflows)/Initial Cost; IRR = rate where
Formulas NPV = 0; Payback = time to recover initial cost
NGN-style application problems, project ranking, capital rationing decisions,
2026 Focus
reinvestment rate assumptions
,Section 1: Net Present Value (NPV)
1.1 NPV Fundamentals
Q1. The difference between the present value of an
investment's future cash flows and its initial cost is the:
A) Net present value
B) Internal rate of return
C) Payback period
D) Profitability index
Answer: A
Rationale: Net present value (NPV) is the difference between
the present value of a project's future cash flows and its initial
cost. It measures the net increase or decrease in firm wealth
due to the project.
Q2. If a project has a positive NPV, the project should be:
A) Rejected
B) Accepted
C) Postponed
D) Evaluated using the payback method
Answer: B
Rationale: The decision rule for NPV is to accept projects with a
positive NPV and reject projects with a negative NPV. A positive
NPV means the project creates value for the firm.
,Q3. If a project has a negative NPV, the project should be:
A) Accepted
B) Rejected
C) Evaluated using the IRR method
D) Evaluated using the payback method
Answer: B
Rationale: A negative NPV means the project destroys value for
the firm and should be rejected. Any type of project should be
rejected if the NPV is negative.
Q4. Which of the following is TRUE about NPV?
A) It ignores the time value of money
B) It uses all cash flows and adjusts for the time value of money
C) It is biased toward short-term projects
D) It cannot handle unconventional cash flows
Answer: B
Rationale: NPV uses all cash flows from a project and adjusts
for the time value of money by discounting them to the
present. It is considered a superior method of analysis.
Q5. What is the primary reason that projects with positive NPVs
are considered acceptable?
A) They are easy to calculate
B) They create value for the owners of the firm
, C) They have short payback periods
D) They have high IRRs
Answer: B
Rationale: Projects with positive NPVs are acceptable because
they create value for the owners of the firm. The NPV
specifically measures the net increase in firm wealth due to the
project.
Q6. A project requires an initial investment of $50,000 and is
expected to generate cash flows of $20,000 per year for 4 years.
If the discount rate is 10%, what is the NPV?
A) $13,397.20
B) $30,000.00
C) $13,000.00
D) $20,000.00
Answer: A
Rationale: NPV = -$50,000 + $20,000 × PVIFA(10%, 4) = -
$50,000 + $20,000 × 3.1699 = -$50,000 + $63,397.20 =
$13,397.20.
Q7. A project requires an initial investment of $100,000 and is
expected to generate cash flows of $30,000 per year for 5 years.
If the discount rate is 12%, what is the NPV?
A) $8,143.32
B) $50,000.00
(Verified Update)
This comprehensive study guide covers the core domains tested
on FINC 3610 Exam 3: Capital Budgeting Dynamics at Auburn
University. It includes original practice questions with detailed
rationales, organized by the core exam domains: Net Present
Value (NPV) , Internal Rate of Return (IRR) , Profitability Index
(PI) , Payback Period & Discounted Payback, and Capital
Rationing & Project Selection.
Exam Overview & Blueprint:
Parameter Details
Exam
Multiple-choice, true/false, and calculation-based questions
Format
NPV, IRR, PI, payback period, discounted payback, mutually exclusive projects,
Core Topics
capital rationing
Key NPV = PV(inflows) – Initial Cost; PI = PV(inflows)/Initial Cost; IRR = rate where
Formulas NPV = 0; Payback = time to recover initial cost
NGN-style application problems, project ranking, capital rationing decisions,
2026 Focus
reinvestment rate assumptions
,Section 1: Net Present Value (NPV)
1.1 NPV Fundamentals
Q1. The difference between the present value of an
investment's future cash flows and its initial cost is the:
A) Net present value
B) Internal rate of return
C) Payback period
D) Profitability index
Answer: A
Rationale: Net present value (NPV) is the difference between
the present value of a project's future cash flows and its initial
cost. It measures the net increase or decrease in firm wealth
due to the project.
Q2. If a project has a positive NPV, the project should be:
A) Rejected
B) Accepted
C) Postponed
D) Evaluated using the payback method
Answer: B
Rationale: The decision rule for NPV is to accept projects with a
positive NPV and reject projects with a negative NPV. A positive
NPV means the project creates value for the firm.
,Q3. If a project has a negative NPV, the project should be:
A) Accepted
B) Rejected
C) Evaluated using the IRR method
D) Evaluated using the payback method
Answer: B
Rationale: A negative NPV means the project destroys value for
the firm and should be rejected. Any type of project should be
rejected if the NPV is negative.
Q4. Which of the following is TRUE about NPV?
A) It ignores the time value of money
B) It uses all cash flows and adjusts for the time value of money
C) It is biased toward short-term projects
D) It cannot handle unconventional cash flows
Answer: B
Rationale: NPV uses all cash flows from a project and adjusts
for the time value of money by discounting them to the
present. It is considered a superior method of analysis.
Q5. What is the primary reason that projects with positive NPVs
are considered acceptable?
A) They are easy to calculate
B) They create value for the owners of the firm
, C) They have short payback periods
D) They have high IRRs
Answer: B
Rationale: Projects with positive NPVs are acceptable because
they create value for the owners of the firm. The NPV
specifically measures the net increase in firm wealth due to the
project.
Q6. A project requires an initial investment of $50,000 and is
expected to generate cash flows of $20,000 per year for 4 years.
If the discount rate is 10%, what is the NPV?
A) $13,397.20
B) $30,000.00
C) $13,000.00
D) $20,000.00
Answer: A
Rationale: NPV = -$50,000 + $20,000 × PVIFA(10%, 4) = -
$50,000 + $20,000 × 3.1699 = -$50,000 + $63,397.20 =
$13,397.20.
Q7. A project requires an initial investment of $100,000 and is
expected to generate cash flows of $30,000 per year for 5 years.
If the discount rate is 12%, what is the NPV?
A) $8,143.32
B) $50,000.00
