BFIN300 Final Review Exam Questions With Solutions
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Course
BFIN300
Institution
BFIN300
BFIN300 Final Review Exam Questions With
Solutions
Formula of NPV NPV = PV of Cash Flows - Initial Investment
What is your role as an investor, treasurer, CEO or CFO? To determine which investment
has a positive net present value (shareholder value)
-done through capital budgeting process
+...
5 Capital Budgeting Methods 1) Payback Period Rule
2) Discounted Payback Period
3) Average Accounting Return
4) Internal Rate of Return
5) Profitability Index
,BFIN300 Final Review Exam Questions With
Solutions
Payback Period Rule the amount of time required for an investment to pay itself (original
cost)
Discounted Payback Period Amount of time for discounted cash flow to equal 0
Discounted Cash Flow What you are losing by not investing (in a given period)
Average Accounting Return Average net income/average book value
-> average annual profit/ initial investment
Internal rate of return Discount rate that makes the NPV of a particular investment 0
Profitability Index Present value of investment future cash flows divided by its initial cost
(1+ = accept, below 1 = reject)
Internal Rate of Return (IRR) the single rate of return that summarizes the merits of a
specific project.
-depends ONLY on the cash flows of the SPECIFIC project!
, BFIN300 Final Review Exam Questions With
Solutions
IRR formula IRR = (It's value to you at the end of the term - initial investment you paid)/
Initial investment you paid
-PERCENTAGE
Formula for calculating IRR without discount rate NPV = (Initial investment) + [Value at
the end of term/(1 + R)]
NPV = ($100) + [$110/(1+R)]
1 + R = $110/$100 = 1.1
R = 10%
IRR advantages -closely related to NPV
-Leads to identical Decisions
IRR disadvantages -may result in multiple answers with nonconventional cash flows
-may lead to incorrect decisions in comparisons of mutually exclusive investments
Discounted Cash Flow Projected cash flows = important to discounted cash flow analysis
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