Finance 301 | Questions with 100% Verified Answers | Latest
Update 2026/2027
Question: Capital Budgeting, Capital refers to
Answer:
capital refers to long term financing used to acquire fixed assets or fund any long term
project
Question: Capital Budgeting, Budgeting refers to
Answer:
Implies an expenditure plan
Question: Capital Budgeting
Answer:
is the decision area of financial management that establishes criteria for investing
resources in long term projects
Question: "Project" (in capital budgeting)
Answer:
a generic term for long term expenditures
Question: What are the different types of projects?
Answer:
Replacement of old or obsolete equipment
expansion of current operations
expansion into new products or markets
non revenue or mandatory projects
independent vs. mutually exclusive projects
Question: Payback
Answer:
How long will it take to recoup our initial investment? Pluses: easy to compute, gives
insight to liquidity
Minuses: Ignores TVM, ignores cash flows beyond the payback period, biased against
long term projects
Decision rule: if payback is <= maximum allowable period, accept
, Question: Discounted Payback
Answer:
How long will it take to recoup our initial investment in todays dollars?
Plus: adjusts to changing required returns (discount rate)
Minus: still ignores cash flows beyond the discounted payback period
Decision Rule: if payback is <= maximum allowable period, accept
Question: Net Present value
Answer:
Does the investment create or destroy value?
NPV= PV of inflows-PV of outflows
if NPV is positive, project creates wealth
decision rule: if inflows >= outflows, accept (if NPV >=0, accept)
if NPV is positive, project creates wealth
Question: Profitability Index
Answer:
Relative size of the PV of a projects inflows to the PV of its outflows (aka bang for the
buck)
Useful when explaining results to people who don't understand TVM
PV of inflows/PV of outflows
decision rule: if PI >= 1.00, accept
Question: Internal Rate of Return
Answer:
The precise interest rate that equates the PV of the inflows w/ the PV of the outflows
(gives us NPV of 0)
Cost of capital is generally also the required rate of return
the sign of NPV is important relative to IRR
decision rule: if IRR>cost of capital (that financed the project), accept
if NPV is positive, the IRR will be > than discounted rate
if NPV is negative, IRR will be < discount rate
Question: Conflicts in Ranking capital budgeting tools
Answer:
Each capital budgeting tool will lead to a accept/reject decision
however, NPV and IRR can result in different rankings due to underlying assumptions and
a little quirk in IRR math
NPV is superior
IRR is used more often
Update 2026/2027
Question: Capital Budgeting, Capital refers to
Answer:
capital refers to long term financing used to acquire fixed assets or fund any long term
project
Question: Capital Budgeting, Budgeting refers to
Answer:
Implies an expenditure plan
Question: Capital Budgeting
Answer:
is the decision area of financial management that establishes criteria for investing
resources in long term projects
Question: "Project" (in capital budgeting)
Answer:
a generic term for long term expenditures
Question: What are the different types of projects?
Answer:
Replacement of old or obsolete equipment
expansion of current operations
expansion into new products or markets
non revenue or mandatory projects
independent vs. mutually exclusive projects
Question: Payback
Answer:
How long will it take to recoup our initial investment? Pluses: easy to compute, gives
insight to liquidity
Minuses: Ignores TVM, ignores cash flows beyond the payback period, biased against
long term projects
Decision rule: if payback is <= maximum allowable period, accept
, Question: Discounted Payback
Answer:
How long will it take to recoup our initial investment in todays dollars?
Plus: adjusts to changing required returns (discount rate)
Minus: still ignores cash flows beyond the discounted payback period
Decision Rule: if payback is <= maximum allowable period, accept
Question: Net Present value
Answer:
Does the investment create or destroy value?
NPV= PV of inflows-PV of outflows
if NPV is positive, project creates wealth
decision rule: if inflows >= outflows, accept (if NPV >=0, accept)
if NPV is positive, project creates wealth
Question: Profitability Index
Answer:
Relative size of the PV of a projects inflows to the PV of its outflows (aka bang for the
buck)
Useful when explaining results to people who don't understand TVM
PV of inflows/PV of outflows
decision rule: if PI >= 1.00, accept
Question: Internal Rate of Return
Answer:
The precise interest rate that equates the PV of the inflows w/ the PV of the outflows
(gives us NPV of 0)
Cost of capital is generally also the required rate of return
the sign of NPV is important relative to IRR
decision rule: if IRR>cost of capital (that financed the project), accept
if NPV is positive, the IRR will be > than discounted rate
if NPV is negative, IRR will be < discount rate
Question: Conflicts in Ranking capital budgeting tools
Answer:
Each capital budgeting tool will lead to a accept/reject decision
however, NPV and IRR can result in different rankings due to underlying assumptions and
a little quirk in IRR math
NPV is superior
IRR is used more often
