FIN 5063 Week 6 Quiz | Questions and
Answers | 2026/27 Update | 100% Correct
-Trine University.
Practice Question Bank & Answer Rationale
THIS PACK CONTAINS
100 exam-style multiple-choice questions. Each question includes the correct answer and a complete
rationale for focused revision.
COVERAGE
This quiz assesses mastery of capital budgeting, cost of capital, risk-return tradeoffs, capital rationing, and
project evaluation techniques consistent with FIN 5063 Week 6 learning objectives. It emphasizes application
of NPV, IRR, MIRR, PI, WACC, and scenario analysis to realistic corporate investment decisions.
STUDY GUIDE
Recommended duration: 60 minutes. Passing target: 70%.
HIGHP - Page 1 of 33
,1. A project requires an initial outlay of $500,000 and generates after-tax cash inflows of
$180,000 per year for four years. If the firm's required rate of return is 10%, what is the
project's net present value (NPV)?
[ ] A. $70,560
[ ] B. $80,420
[ ] C. $60,000
[ ] D. $90,000
CORRECT: A. $70,560
NPV = -500,000 + 180,000 × PVIFA(10%,4). PVIFA(10%,4)=3.1699, so 180,000×3.1699=570,582.
NPV=570,582-500,000=$70,582, closest to $70,560. The other options misapply the annuity factor or ignore
discounting.
2. Which of the following is the most appropriate discount rate to use when evaluating a
project that is riskier than the firm's average project?
[ ] A. The firm's overall WACC
[ ] B. The risk-free rate
[ ] C. A project-specific hurdle rate higher than the firm's WACC
[ ] D. The cost of debt
CORRECT: C. A project-specific hurdle rate higher than the firm's WACC
Riskier projects should be evaluated with a higher discount rate to reflect increased required return. Using the
firm's WACC would undervalue risk; risk-free rate ignores risk entirely; cost of debt ignores equity and project
risk.
3. A firm has a capital budget of $1,000,000 and four independent projects with the
following profitability indices (PI) and initial investments: Project A PI=1.25, $400,000;
Project B PI=1.10, $300,000; Project C PI=1.40, $500,000; Project D PI=1.05, $200,000.
Which combination maximizes total NPV under capital rationing?
[ ] A. A, B, and D
[ ] B. C and A
[ ] C. C, B, and D
[ ] D. A, B, and C
CORRECT: B. C and A
Rank by PI: C (1.40, $500k), A (1.25, $400k), B (1.10, $300k), D (1.05, $200k). With $1M, select C+A =
$900k invested, NPV = $200k+$100k=$300k. C+B+D = $1M invested, NPV=$200k+$30k+$10k=$240k.
A+B+D=$900k, NPV=$100k+$30k+$10k=$140k. A+B+C exceeds budget.
HIGHP - Page 2 of 33
,4. A project has cash flows: Year 0: -$1,000; Year 1: $2,500; Year 2: -$1,600. Which
statement about the IRR is correct?
[ ] A. The project has no IRR.
[ ] B. The project has exactly one IRR.
[ ] C. The project has multiple IRRs due to sign changes.
[ ] D. The IRR equals the WACC.
CORRECT: C. The project has multiple IRRs due to sign changes.
The cash flow stream changes sign twice (-, +, -), which can produce multiple IRRs. This is a classic pitfall;
NPV should be used instead. The other options incorrectly assume a single or zero IRR.
5. A firm is considering a project with an initial investment of $200,000 and expected
annual cash inflows of $60,000 for five years. What is the project's payback period?
[ ] A. 3.00 years
[ ] B. 3.33 years
[ ] C. 4.00 years
[ ] D. 5.00 years
CORRECT: B. 3.33 years
Payback = Initial investment / Annual cash inflow = $200,000 / $60,000 = 3.33 years. The other options
miscalculate the division or assume different cash flows.
6. Which of the following best describes the modified internal rate of return (MIRR)?
[ ] A. It assumes reinvestment at the project's IRR.
[ ] B. It assumes reinvestment at the firm's cost of capital.
[ ] C. It is always equal to the IRR.
[ ] D. It ignores the initial investment.
CORRECT: B. It assumes reinvestment at the firm's cost of capital.
MIRR assumes cash inflows are reinvested at the cost of capital, providing a more realistic reinvestment
assumption than IRR. It can differ from IRR and does consider the initial investment.
7. A company's capital structure is 40% debt and 60% equity. The before-tax cost of debt
is 6%, the corporate tax rate is 25%, and the cost of equity is 12%. What is the firm's
WACC?
[ ] A. 8.40%
[ ] B. 9.00%
[ ] C. 9.60%
[ ] D. 10.20%
HIGHP - Page 3 of 33
, CORRECT: B. 9.00%
After-tax cost of debt = 6% × (1-0.25) = 4.5%. WACC = 0.4×4.5% + 0.6×12% = 1.8% + 7.2% = 9.0%. Other
options fail to adjust for taxes or misweight components.
8. In a scenario analysis, a project's NPV is positive under the base case but negative
under a recession scenario. This indicates that the project:
[ ] A. Is risk-free
[ ] B. Has no downside risk
[ ] C. Is sensitive to economic conditions
[ ] D. Should always be accepted
CORRECT: C. Is sensitive to economic conditions
A negative NPV in a recession scenario shows the project's value is sensitive to economic conditions. It does
not imply risk-free status or that the project should always be accepted.
9. A firm evaluates two mutually exclusive projects: Project X has NPV = $50,000 and IRR =
15%; Project Y has NPV = $60,000 and IRR = 12%. The firm's cost of capital is 10%. Which
project should be chosen and why?
[ ] A. Project X, because it has a higher IRR
[ ] B. Project Y, because it has a higher NPV
[ ] C. Project X, because it has a lower initial investment
[ ] D. Neither, because IRRs are both above cost of capital
CORRECT: B. Project Y, because it has a higher NPV
For mutually exclusive projects, NPV is the preferred criterion because it measures value added in dollar
terms. Project Y adds $60,000 versus $50,000 for X, despite X's higher IRR.
10. Which of the following is a limitation of the payback period method?
[ ] A. It considers the time value of money.
[ ] B. It ignores cash flows after the payback period.
[ ] C. It is difficult to compute.
[ ] D. It always selects the most profitable project.
CORRECT: B. It ignores cash flows after the payback period.
The payback period ignores cash flows occurring after the cutoff and does not consider the time value of
money. It is simple to compute but can lead to suboptimal decisions.
HIGHP - Page 4 of 33
Answers | 2026/27 Update | 100% Correct
-Trine University.
Practice Question Bank & Answer Rationale
THIS PACK CONTAINS
100 exam-style multiple-choice questions. Each question includes the correct answer and a complete
rationale for focused revision.
COVERAGE
This quiz assesses mastery of capital budgeting, cost of capital, risk-return tradeoffs, capital rationing, and
project evaluation techniques consistent with FIN 5063 Week 6 learning objectives. It emphasizes application
of NPV, IRR, MIRR, PI, WACC, and scenario analysis to realistic corporate investment decisions.
STUDY GUIDE
Recommended duration: 60 minutes. Passing target: 70%.
HIGHP - Page 1 of 33
,1. A project requires an initial outlay of $500,000 and generates after-tax cash inflows of
$180,000 per year for four years. If the firm's required rate of return is 10%, what is the
project's net present value (NPV)?
[ ] A. $70,560
[ ] B. $80,420
[ ] C. $60,000
[ ] D. $90,000
CORRECT: A. $70,560
NPV = -500,000 + 180,000 × PVIFA(10%,4). PVIFA(10%,4)=3.1699, so 180,000×3.1699=570,582.
NPV=570,582-500,000=$70,582, closest to $70,560. The other options misapply the annuity factor or ignore
discounting.
2. Which of the following is the most appropriate discount rate to use when evaluating a
project that is riskier than the firm's average project?
[ ] A. The firm's overall WACC
[ ] B. The risk-free rate
[ ] C. A project-specific hurdle rate higher than the firm's WACC
[ ] D. The cost of debt
CORRECT: C. A project-specific hurdle rate higher than the firm's WACC
Riskier projects should be evaluated with a higher discount rate to reflect increased required return. Using the
firm's WACC would undervalue risk; risk-free rate ignores risk entirely; cost of debt ignores equity and project
risk.
3. A firm has a capital budget of $1,000,000 and four independent projects with the
following profitability indices (PI) and initial investments: Project A PI=1.25, $400,000;
Project B PI=1.10, $300,000; Project C PI=1.40, $500,000; Project D PI=1.05, $200,000.
Which combination maximizes total NPV under capital rationing?
[ ] A. A, B, and D
[ ] B. C and A
[ ] C. C, B, and D
[ ] D. A, B, and C
CORRECT: B. C and A
Rank by PI: C (1.40, $500k), A (1.25, $400k), B (1.10, $300k), D (1.05, $200k). With $1M, select C+A =
$900k invested, NPV = $200k+$100k=$300k. C+B+D = $1M invested, NPV=$200k+$30k+$10k=$240k.
A+B+D=$900k, NPV=$100k+$30k+$10k=$140k. A+B+C exceeds budget.
HIGHP - Page 2 of 33
,4. A project has cash flows: Year 0: -$1,000; Year 1: $2,500; Year 2: -$1,600. Which
statement about the IRR is correct?
[ ] A. The project has no IRR.
[ ] B. The project has exactly one IRR.
[ ] C. The project has multiple IRRs due to sign changes.
[ ] D. The IRR equals the WACC.
CORRECT: C. The project has multiple IRRs due to sign changes.
The cash flow stream changes sign twice (-, +, -), which can produce multiple IRRs. This is a classic pitfall;
NPV should be used instead. The other options incorrectly assume a single or zero IRR.
5. A firm is considering a project with an initial investment of $200,000 and expected
annual cash inflows of $60,000 for five years. What is the project's payback period?
[ ] A. 3.00 years
[ ] B. 3.33 years
[ ] C. 4.00 years
[ ] D. 5.00 years
CORRECT: B. 3.33 years
Payback = Initial investment / Annual cash inflow = $200,000 / $60,000 = 3.33 years. The other options
miscalculate the division or assume different cash flows.
6. Which of the following best describes the modified internal rate of return (MIRR)?
[ ] A. It assumes reinvestment at the project's IRR.
[ ] B. It assumes reinvestment at the firm's cost of capital.
[ ] C. It is always equal to the IRR.
[ ] D. It ignores the initial investment.
CORRECT: B. It assumes reinvestment at the firm's cost of capital.
MIRR assumes cash inflows are reinvested at the cost of capital, providing a more realistic reinvestment
assumption than IRR. It can differ from IRR and does consider the initial investment.
7. A company's capital structure is 40% debt and 60% equity. The before-tax cost of debt
is 6%, the corporate tax rate is 25%, and the cost of equity is 12%. What is the firm's
WACC?
[ ] A. 8.40%
[ ] B. 9.00%
[ ] C. 9.60%
[ ] D. 10.20%
HIGHP - Page 3 of 33
, CORRECT: B. 9.00%
After-tax cost of debt = 6% × (1-0.25) = 4.5%. WACC = 0.4×4.5% + 0.6×12% = 1.8% + 7.2% = 9.0%. Other
options fail to adjust for taxes or misweight components.
8. In a scenario analysis, a project's NPV is positive under the base case but negative
under a recession scenario. This indicates that the project:
[ ] A. Is risk-free
[ ] B. Has no downside risk
[ ] C. Is sensitive to economic conditions
[ ] D. Should always be accepted
CORRECT: C. Is sensitive to economic conditions
A negative NPV in a recession scenario shows the project's value is sensitive to economic conditions. It does
not imply risk-free status or that the project should always be accepted.
9. A firm evaluates two mutually exclusive projects: Project X has NPV = $50,000 and IRR =
15%; Project Y has NPV = $60,000 and IRR = 12%. The firm's cost of capital is 10%. Which
project should be chosen and why?
[ ] A. Project X, because it has a higher IRR
[ ] B. Project Y, because it has a higher NPV
[ ] C. Project X, because it has a lower initial investment
[ ] D. Neither, because IRRs are both above cost of capital
CORRECT: B. Project Y, because it has a higher NPV
For mutually exclusive projects, NPV is the preferred criterion because it measures value added in dollar
terms. Project Y adds $60,000 versus $50,000 for X, despite X's higher IRR.
10. Which of the following is a limitation of the payback period method?
[ ] A. It considers the time value of money.
[ ] B. It ignores cash flows after the payback period.
[ ] C. It is difficult to compute.
[ ] D. It always selects the most profitable project.
CORRECT: B. It ignores cash flows after the payback period.
The payback period ignores cash flows occurring after the cutoff and does not consider the time value of
money. It is simple to compute but can lead to suboptimal decisions.
HIGHP - Page 4 of 33
