BA 323 NIELANDER ACTUAL EXAM QUESTIONS WITH
SOLUTIONS GRADED A+2025/2026
✔✔Which of the methods is the best (NPV or IRR)? Why? - ✔✔NPV is better
- reinvesting at the opportunity cost of capital is more realistic.
✔✔Why is the MIRR a better measure than IRR? - ✔✔MIRR assumes that cash flows
are reinvested at the WACC (or opportunity cost) which is more realistic.
- MIRR also avoids the multiple IRR problem
✔✔What is the payback period? - ✔✔The number of years required to recover a
projects' cost.
✔✔Why do companies often calculate this measure despite its problems? Discuss its
strengths and weaknesses. - ✔✔Pro: easy to calculate and a quick indication of a
project's risk
Con: ignores the Time value of money, ignores CFs are the payback period, no relation
with investor wealth maximization
Discounted payback accounts of the time value of money, both not the other 2 flaws.
✔✔What is scenario analysis? Why is it used? - ✔✔Projecting cash flows under
different possible investment outcomes
✔✔What is the baseline scenario? - ✔✔projected cash flows under the most likely
scenario
✔✔Why do managers care about worst-case scenarios more than other scenarios? -
✔✔Worst-case scenario: try to avoid bankruptcy or being fired.
✔✔How can using comparables improve forecast accuracy? - ✔✔Comparables; use
existing projects to predict cash flows, often improves forecast accuracy because
projections are based on real-world scenarios.
✔✔How can Monte Carlo simulations improve forecast accuracy? - ✔✔Allows you to
estimate a large number of scenarios for investment analysis
✔✔What are the 3 types of project risk? Be able to describe stand-alone risk, corporate
risk, and market risk. - ✔✔Stand-alone
- The project's total risk, if it were operated independently
- Usually measured by standard deviation (or coefficient of variation)
- However, it ignores the firm's diversification among projects and investors'
diversification among firms.
Corporate
, - The project's risk when considering the firm's other projects, i.e., diversification within
the firm
- a function of the project's NPV and standard deviation and its correlation with the
returns on other firm projects.
Market risk
- The project's risk to a well-diversified investor
- Theoretically, it is measured by the project's beta and it considers both corporate and
stockholder diversification
✔✔Which risk is most relevant for corporations? Why? - ✔✔Market risk
- management's primary goal is shareholder wealth maximization.
- Care most about systematic risk.
✔✔What is real option analysis? - ✔✔the analysis of capital budgeting projects for
which managers can take positive actions after the investment to alter the project's cash
flows
✔✔Why does real option analysis matter for deciding which projects to accept? -
✔✔Value isn't captured by conventional NPV analysis
✔✔What are the different types of real options? - ✔✔- Abandonment
- Investment timing
- Expansion potential
- Output flexibility
- Input flexibility
✔✔What are 4 other considerations that managers may consider when deciding to
accept or reject a project? - ✔✔- Opportunity cost
- Cannibalization
- Complementary
- Sunk cost
✔✔What is return on invested capital? - ✔✔ROIC measures after-tax return that the
company provides for all its investors
✔✔Does ROIC vary with changes in capital structure? - ✔✔No
✔✔Does ROE vary with changes in capital structure? - ✔✔Yes
✔✔What is business risk? - ✔✔The riskiness inherent in the firm's operations if it uses
no debt
SOLUTIONS GRADED A+2025/2026
✔✔Which of the methods is the best (NPV or IRR)? Why? - ✔✔NPV is better
- reinvesting at the opportunity cost of capital is more realistic.
✔✔Why is the MIRR a better measure than IRR? - ✔✔MIRR assumes that cash flows
are reinvested at the WACC (or opportunity cost) which is more realistic.
- MIRR also avoids the multiple IRR problem
✔✔What is the payback period? - ✔✔The number of years required to recover a
projects' cost.
✔✔Why do companies often calculate this measure despite its problems? Discuss its
strengths and weaknesses. - ✔✔Pro: easy to calculate and a quick indication of a
project's risk
Con: ignores the Time value of money, ignores CFs are the payback period, no relation
with investor wealth maximization
Discounted payback accounts of the time value of money, both not the other 2 flaws.
✔✔What is scenario analysis? Why is it used? - ✔✔Projecting cash flows under
different possible investment outcomes
✔✔What is the baseline scenario? - ✔✔projected cash flows under the most likely
scenario
✔✔Why do managers care about worst-case scenarios more than other scenarios? -
✔✔Worst-case scenario: try to avoid bankruptcy or being fired.
✔✔How can using comparables improve forecast accuracy? - ✔✔Comparables; use
existing projects to predict cash flows, often improves forecast accuracy because
projections are based on real-world scenarios.
✔✔How can Monte Carlo simulations improve forecast accuracy? - ✔✔Allows you to
estimate a large number of scenarios for investment analysis
✔✔What are the 3 types of project risk? Be able to describe stand-alone risk, corporate
risk, and market risk. - ✔✔Stand-alone
- The project's total risk, if it were operated independently
- Usually measured by standard deviation (or coefficient of variation)
- However, it ignores the firm's diversification among projects and investors'
diversification among firms.
Corporate
, - The project's risk when considering the firm's other projects, i.e., diversification within
the firm
- a function of the project's NPV and standard deviation and its correlation with the
returns on other firm projects.
Market risk
- The project's risk to a well-diversified investor
- Theoretically, it is measured by the project's beta and it considers both corporate and
stockholder diversification
✔✔Which risk is most relevant for corporations? Why? - ✔✔Market risk
- management's primary goal is shareholder wealth maximization.
- Care most about systematic risk.
✔✔What is real option analysis? - ✔✔the analysis of capital budgeting projects for
which managers can take positive actions after the investment to alter the project's cash
flows
✔✔Why does real option analysis matter for deciding which projects to accept? -
✔✔Value isn't captured by conventional NPV analysis
✔✔What are the different types of real options? - ✔✔- Abandonment
- Investment timing
- Expansion potential
- Output flexibility
- Input flexibility
✔✔What are 4 other considerations that managers may consider when deciding to
accept or reject a project? - ✔✔- Opportunity cost
- Cannibalization
- Complementary
- Sunk cost
✔✔What is return on invested capital? - ✔✔ROIC measures after-tax return that the
company provides for all its investors
✔✔Does ROIC vary with changes in capital structure? - ✔✔No
✔✔Does ROE vary with changes in capital structure? - ✔✔Yes
✔✔What is business risk? - ✔✔The riskiness inherent in the firm's operations if it uses
no debt
