FIN 5063 Week 3 Quiz | Questions and
Answers | 2026 Updated | 100% Correct -
Trine University.
Practice Question Bank & Answer Rationale
THIS PACK CONTAINS
90 exam-style multiple-choice questions. Each question includes the correct answer and a complete rationale
for focused revision.
COVERAGE
This exam assesses mastery of core corporate finance concepts covered in Week 3 of FIN 5063, including
time value of money, capital budgeting, risk and return, and valuation. Questions require application and
analysis at the graduate level.
STUDY GUIDE
Recommended duration: 2 hours. Passing target: 70%.
HIGHP - Page 1 of 29
,1. A project requires an initial investment of $50,000 and is expected to generate annual
cash inflows of $12,000 for 6 years. If the required rate of return is 10%, what is the
project's net present value (NPV)?
[ ] A. $2,264
[ ] B. $10,000
[ ] C. -$2,264
[ ] D. $5,000
CORRECT: A. $2,264
NPV = -50,000 + 12,000 × PVIFA(10%,6). PVIFA = 4.355, so 12,000 × 4.355 = 52,260, minus 50,000 = 2,260.
Thus, NPV is approximately $2,264. The other options are incorrect because they misapply the discounting
or use incorrect factors.
2. Which of the following statements about the internal rate of return (IRR) is most
accurate?
[ ] A. IRR is the discount rate that makes the NPV of a project equal to zero.
[ ] B. IRR is always greater than the required rate of return for acceptable projects.
[ ] C. IRR assumes reinvestment of cash flows at the required rate of return.
[ ] D. IRR and NPV always give the same accept/reject decision for mutually exclusive projects.
CORRECT: A. IRR is the discount rate that makes the NPV of a project equal to zero.
IRR is defined as the discount rate at which NPV equals zero. Option B is not always true; IRR can be less
than the required return for unacceptable projects. Option C is incorrect because IRR assumes reinvestment
at IRR, not the required return. Option D is false due to scale and timing differences.
3. A stock has a beta of 1.2, the risk-free rate is 3%, and the market risk premium is 6%.
According to the CAPM, what is the required rate of return on the stock?
[ ] A. 10.2%
[ ] B. 9.0%
[ ] C. 7.2%
[ ] D. 12.0%
CORRECT: A. 10.2%
CAPM: Required return = risk-free rate + beta × market risk premium = 3% + 1.2 × 6% = 10.2%. The other
options miscalculate the beta adjustment or misapply the formula.
4. Which of the following is a key assumption of the payback period method?
[ ] A. It considers the time value of money.
[ ] B. It ignores cash flows after the payback period.
[ ] C. It maximizes shareholder wealth.
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, [ ] D. It accounts for risk through the discount rate.
CORRECT: B. It ignores cash flows after the payback period.
The payback period method ignores cash flows that occur after the initial investment is recovered, which is a
major criticism. It does not consider the time value of money (unless discounted payback is used), does not
necessarily maximize wealth, and does not adjust for risk via discounting.
5. A company has a weighted average cost of capital (WACC) of 8%. It is considering a
project with an expected return of 7%. What should the company do?
[ ] A. Accept the project because the return is positive.
[ ] B. Reject the project because the return is less than the WACC.
[ ] C. Accept the project because the return is close to the WACC.
[ ] D. Reject the project because the return is less than the risk-free rate.
CORRECT: B. Reject the project because the return is less than the WACC.
A project should be accepted if its expected return exceeds the WACC (the opportunity cost of capital). Since
7% < 8%, the project would destroy value and should be rejected. The other options incorrectly justify
acceptance.
6. Which of the following best describes the concept of 'sunk costs' in capital budgeting?
[ ] A. Costs that have already been incurred and cannot be recovered.
[ ] B. Costs that vary with the level of production.
[ ] C. Costs that are relevant for decision making.
[ ] D. Costs that are incurred only if a project is accepted.
CORRECT: A. Costs that have already been incurred and cannot be recovered.
Sunk costs are past costs that cannot be recovered and should be ignored in incremental analysis. They are
not variable costs, not relevant, and not incremental. The other options describe other cost types.
7. A firm is evaluating two mutually exclusive projects with the following cash flows:
Project A: initial outlay $100,000, annual inflows $30,000 for 5 years. Project B: initial
outlay $150,000, annual inflows $40,000 for 5 years. If the discount rate is 10%, which
project should be chosen based on NPV?
[ ] A. Project A, because it has a higher NPV.
[ ] B. Project B, because it has a higher NPV.
[ ] C. Project A, because it has a shorter payback period.
[ ] D. Project B, because it has a higher IRR.
CORRECT: B. Project B, because it has a higher NPV.
NPV of A = -100,000 + 30,000 × 3.791 = 13,730. NPV of B = -150,000 + 40,000 × 3.791 = 1,640. Project A
HIGHP - Page 3 of 29
Answers | 2026 Updated | 100% Correct -
Trine University.
Practice Question Bank & Answer Rationale
THIS PACK CONTAINS
90 exam-style multiple-choice questions. Each question includes the correct answer and a complete rationale
for focused revision.
COVERAGE
This exam assesses mastery of core corporate finance concepts covered in Week 3 of FIN 5063, including
time value of money, capital budgeting, risk and return, and valuation. Questions require application and
analysis at the graduate level.
STUDY GUIDE
Recommended duration: 2 hours. Passing target: 70%.
HIGHP - Page 1 of 29
,1. A project requires an initial investment of $50,000 and is expected to generate annual
cash inflows of $12,000 for 6 years. If the required rate of return is 10%, what is the
project's net present value (NPV)?
[ ] A. $2,264
[ ] B. $10,000
[ ] C. -$2,264
[ ] D. $5,000
CORRECT: A. $2,264
NPV = -50,000 + 12,000 × PVIFA(10%,6). PVIFA = 4.355, so 12,000 × 4.355 = 52,260, minus 50,000 = 2,260.
Thus, NPV is approximately $2,264. The other options are incorrect because they misapply the discounting
or use incorrect factors.
2. Which of the following statements about the internal rate of return (IRR) is most
accurate?
[ ] A. IRR is the discount rate that makes the NPV of a project equal to zero.
[ ] B. IRR is always greater than the required rate of return for acceptable projects.
[ ] C. IRR assumes reinvestment of cash flows at the required rate of return.
[ ] D. IRR and NPV always give the same accept/reject decision for mutually exclusive projects.
CORRECT: A. IRR is the discount rate that makes the NPV of a project equal to zero.
IRR is defined as the discount rate at which NPV equals zero. Option B is not always true; IRR can be less
than the required return for unacceptable projects. Option C is incorrect because IRR assumes reinvestment
at IRR, not the required return. Option D is false due to scale and timing differences.
3. A stock has a beta of 1.2, the risk-free rate is 3%, and the market risk premium is 6%.
According to the CAPM, what is the required rate of return on the stock?
[ ] A. 10.2%
[ ] B. 9.0%
[ ] C. 7.2%
[ ] D. 12.0%
CORRECT: A. 10.2%
CAPM: Required return = risk-free rate + beta × market risk premium = 3% + 1.2 × 6% = 10.2%. The other
options miscalculate the beta adjustment or misapply the formula.
4. Which of the following is a key assumption of the payback period method?
[ ] A. It considers the time value of money.
[ ] B. It ignores cash flows after the payback period.
[ ] C. It maximizes shareholder wealth.
HIGHP - Page 2 of 29
, [ ] D. It accounts for risk through the discount rate.
CORRECT: B. It ignores cash flows after the payback period.
The payback period method ignores cash flows that occur after the initial investment is recovered, which is a
major criticism. It does not consider the time value of money (unless discounted payback is used), does not
necessarily maximize wealth, and does not adjust for risk via discounting.
5. A company has a weighted average cost of capital (WACC) of 8%. It is considering a
project with an expected return of 7%. What should the company do?
[ ] A. Accept the project because the return is positive.
[ ] B. Reject the project because the return is less than the WACC.
[ ] C. Accept the project because the return is close to the WACC.
[ ] D. Reject the project because the return is less than the risk-free rate.
CORRECT: B. Reject the project because the return is less than the WACC.
A project should be accepted if its expected return exceeds the WACC (the opportunity cost of capital). Since
7% < 8%, the project would destroy value and should be rejected. The other options incorrectly justify
acceptance.
6. Which of the following best describes the concept of 'sunk costs' in capital budgeting?
[ ] A. Costs that have already been incurred and cannot be recovered.
[ ] B. Costs that vary with the level of production.
[ ] C. Costs that are relevant for decision making.
[ ] D. Costs that are incurred only if a project is accepted.
CORRECT: A. Costs that have already been incurred and cannot be recovered.
Sunk costs are past costs that cannot be recovered and should be ignored in incremental analysis. They are
not variable costs, not relevant, and not incremental. The other options describe other cost types.
7. A firm is evaluating two mutually exclusive projects with the following cash flows:
Project A: initial outlay $100,000, annual inflows $30,000 for 5 years. Project B: initial
outlay $150,000, annual inflows $40,000 for 5 years. If the discount rate is 10%, which
project should be chosen based on NPV?
[ ] A. Project A, because it has a higher NPV.
[ ] B. Project B, because it has a higher NPV.
[ ] C. Project A, because it has a shorter payback period.
[ ] D. Project B, because it has a higher IRR.
CORRECT: B. Project B, because it has a higher NPV.
NPV of A = -100,000 + 30,000 × 3.791 = 13,730. NPV of B = -150,000 + 40,000 × 3.791 = 1,640. Project A
HIGHP - Page 3 of 29
