FIN 300 Final Exam 2026 Questions and
Answers
What type of decision is it if a firm needs to decide what fixed assets they should
purchase? - Correct answer-Capital budgeting decision
What is another name for capital budgeting decisions? - Correct answer-Strategic
asset allocation
What is likely the most important issue in corporate finance? - Correct answer-
Capital budgeting
An investment is worth undertaking if it... - Correct answer-Creates value for its
owners
The difference between an investment's market value and its cost is called the... -
Correct answer-net present value
A measure of how much value is created or added today by undertaking an
investment. - Correct answer-net present value
the capital budgeting process can be viewed as a search for investments with... -
Correct answer-positive NPVs
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,an investment should be accepted if the NPV is ____ and rejected if it is ____. We
will be indifferent if it is __. - Correct answer-positive, negative, zero
The length of time it takes to recover our initial investment. - Correct answer-
payback
According to the payback rule, an investment is acceptable if its calculated
payback period is... - Correct answer-less than some prespecified number of years
What is entirely ignored in the payback period consideration? - Correct answer-
time value of money
Why is time value of money ignored when using payback? - Correct answer-Cash
flows are not discounted
Which rule of determining investments fails to consider risk differences between
projects? - Correct answer-Payback rule
What is the biggest problem with the payback period rule? - Correct answer-
Coming up with the right cutoff period
(T/F) One shortcoming of the payback period is that the cutoff for payback is
typically chosen arbitrarily due to a lack of economic explanation for why it should
be a certain time. - Correct answer-True
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,(T/F) A payback period calculation can lead to a decision that is in conflict with the
NPV calculation, indicating choices that do not match. - Correct answer-.True
Using a payback period rule will usually bias us toward (shorter/longer) term
investments. - Correct answer-Shorter
For which type of decisions is the payback period rule typically used? - Correct
answer-minor decisions
Why do we tend to use payback period for minor decisions? - Correct answer-They
do not warrant detailed analysis because the cost of analysis would exceed possible
losses.
It's usually a good idea to use payback period on minor decisions because an
investment that pays back rapidly and has benefits extending beyond the cutoff
period probably has a... - Correct answer-positive NPV
Because payback period is biased toward (short/long) term investments, it is also
biased towards... - Correct answer-liquidity
Payback period's bias towards liquidity is more useful to (large/small) businesses. -
Correct answer-small
The payback period measures the length of time it takes to break even in a(n)
________ sense. - Correct answer-accounting
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, Payback period doesn't answer the right question, which is ________, not how
long it takes to recover the initial investment. - Correct answer-the impact an
investment will have on the value of a stock
Based on the discounted payback rule, an investment is acceptable if its discounted
payback is... - Correct answer-less than some prespecified number of years.
We compare the _____ of project cash flows with the _______ of the initial
investment when we use the discounted payback period. - Correct answer-future
(T/F) IF a project ever pays back on a discounted basis, then it must have a positive
NPV. - Correct answer-True
Why is it true that if a project ever pays back on a discounted basis, it must have a
positive NPV? - Correct answer-By definition, the NPV is zero when the sum of
the discounted cash flows equals the initial investment.
If the discounted payback period predicts with some accuracy the merit of an
investment, why is it rarely used in practice? - Correct answer-Not really a better
indicator than NPV or any simpler to use.
As long as we use straight line depreciation, the average book value of an
investment will always be... - Correct answer-one half of the initial investment
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Answers
What type of decision is it if a firm needs to decide what fixed assets they should
purchase? - Correct answer-Capital budgeting decision
What is another name for capital budgeting decisions? - Correct answer-Strategic
asset allocation
What is likely the most important issue in corporate finance? - Correct answer-
Capital budgeting
An investment is worth undertaking if it... - Correct answer-Creates value for its
owners
The difference between an investment's market value and its cost is called the... -
Correct answer-net present value
A measure of how much value is created or added today by undertaking an
investment. - Correct answer-net present value
the capital budgeting process can be viewed as a search for investments with... -
Correct answer-positive NPVs
©C0PYRIGHT 2025, ALL RIGHTS RESERVED 1
,an investment should be accepted if the NPV is ____ and rejected if it is ____. We
will be indifferent if it is __. - Correct answer-positive, negative, zero
The length of time it takes to recover our initial investment. - Correct answer-
payback
According to the payback rule, an investment is acceptable if its calculated
payback period is... - Correct answer-less than some prespecified number of years
What is entirely ignored in the payback period consideration? - Correct answer-
time value of money
Why is time value of money ignored when using payback? - Correct answer-Cash
flows are not discounted
Which rule of determining investments fails to consider risk differences between
projects? - Correct answer-Payback rule
What is the biggest problem with the payback period rule? - Correct answer-
Coming up with the right cutoff period
(T/F) One shortcoming of the payback period is that the cutoff for payback is
typically chosen arbitrarily due to a lack of economic explanation for why it should
be a certain time. - Correct answer-True
©C0PYRIGHT 2025, ALL RIGHTS RESERVED 2
,(T/F) A payback period calculation can lead to a decision that is in conflict with the
NPV calculation, indicating choices that do not match. - Correct answer-.True
Using a payback period rule will usually bias us toward (shorter/longer) term
investments. - Correct answer-Shorter
For which type of decisions is the payback period rule typically used? - Correct
answer-minor decisions
Why do we tend to use payback period for minor decisions? - Correct answer-They
do not warrant detailed analysis because the cost of analysis would exceed possible
losses.
It's usually a good idea to use payback period on minor decisions because an
investment that pays back rapidly and has benefits extending beyond the cutoff
period probably has a... - Correct answer-positive NPV
Because payback period is biased toward (short/long) term investments, it is also
biased towards... - Correct answer-liquidity
Payback period's bias towards liquidity is more useful to (large/small) businesses. -
Correct answer-small
The payback period measures the length of time it takes to break even in a(n)
________ sense. - Correct answer-accounting
©C0PYRIGHT 2025, ALL RIGHTS RESERVED 3
, Payback period doesn't answer the right question, which is ________, not how
long it takes to recover the initial investment. - Correct answer-the impact an
investment will have on the value of a stock
Based on the discounted payback rule, an investment is acceptable if its discounted
payback is... - Correct answer-less than some prespecified number of years.
We compare the _____ of project cash flows with the _______ of the initial
investment when we use the discounted payback period. - Correct answer-future
(T/F) IF a project ever pays back on a discounted basis, then it must have a positive
NPV. - Correct answer-True
Why is it true that if a project ever pays back on a discounted basis, it must have a
positive NPV? - Correct answer-By definition, the NPV is zero when the sum of
the discounted cash flows equals the initial investment.
If the discounted payback period predicts with some accuracy the merit of an
investment, why is it rarely used in practice? - Correct answer-Not really a better
indicator than NPV or any simpler to use.
As long as we use straight line depreciation, the average book value of an
investment will always be... - Correct answer-one half of the initial investment
©C0PYRIGHT 2025, ALL RIGHTS RESERVED 4
